The minutes of the RBA’s March board meeting are out and there are a number of interesting insights into the RBA’s current mindset.
Most notable is that at their meeting, which was held the day before the release of the stronger than expected fourth quarter 2015 GDP data, the RBA board thought, “growth appeared to have been slightly below average in the December quarter and over 2015 as a whole”.
That suggests they might have been pleasantly surprised with the stronger than expected 0.6% quarterly growth rate. That’s particularly so given that household consumption was the main driver of growth — contributing 0.4% of the 0.6% total growth — with the minutes noting that the board saw “further indications of a rebalancing of activity towards the non-mining sectors of the economy”.
That strength in the economy could go some way to mitigating the board’s reiteration of previous statements that “low inflation would provide scope to ease monetary policy further, should that be appropriate to lend support to demand”.
On balance still low inflation and better than expected growth would tend to balance each other out. That suggests the RBA is more likely to remain on hold for the foreseeable future.
That is particularly the case given the minutes reflect a spirited defence of the growth outlook for China and the rest of Asia.
“The low level of foreign currency debt, in particular, differentiated China from other emerging economies that had previously experienced financial crises. While the overhang of residential housing inventory and excess capacity in the industrial sector would affect demand for Australia’s resource exports and their prices, the scope for Chinese household incomes to rise over time created long-run potential for Australia to increase exports of rural produce and services, including tourism, to China,” the minutes said.
It’s clear the board remains long-term China bulls and expects Australia to continue to recieve a growth dividend from China.
But against what appears a fairly benign interest rate outlook reflected as a result of these minutes, the question that remains unresolved is what the Board thinks, and perhaps what it might do, about the rise of the Australian dollar.
The minutes reflect a fairly benign view of the Aussie. They show a board who’s comfortable that economic growth continues to be “aided by the low level of interest rates and the depreciation of the exchange rate over the past couple of years, which had responded to the evolving economic outlook”.
But on March 1, when the board last met, the AUDUSD exchange rate was around the mid 71 cent region. It has since risen to a high overnight of 0.7593, and is sitting at 0.7493 after the minutes — a gain of around 5%.
It’s worth noting that today the NAB suggested the Aussie could rally to 78 cents which is likely much stronger than what the RBA meant when it said the Aussie was responding to an “evolving outlook”.
It’s also worth highlighting that just last week when the RBNZ surprised markets with a 25bps rate cut to 2.25% they specifically highlighted that “the trade-weighted exchange rate is more than 4 percent higher than projected in December, and a decline would be appropriate given the weakness in export prices”.
Since MArch 1 the RBA’s own Australian dollar Trade-weighted Index has risen from 61.30 to 64.40 — a gain of 5.06%.
The big question for the RBA, markets and forex traders now is whether the RBA will follow the RBNZ and cut rates because the Aussie dollar is too strong. Or if it is all just a part of its evolution.