The minutes to this month’s RBA Board meeting are out and they confirm two things.
First, that the expectations of staff were for a delay in a return to trend growth if rates were left at 2.5%.
That helped tip the balance toward a cut.
But it was actions by other central banks in lowering rates and weakening their currencies, as well as the performance of the Aussie dollar which seemed to be key drivers of the rate cut.
The Minutes show the Board was concerned that the Aussie dollar’s fall against the US dollar hadn’t been replicated elsewhere and that it was underperforming the fall in commodity prices by staying relatively strong.
The Australian dollar had depreciated by around 9% per cent against the US dollar since the December meeting. On a trade-weighted basis, the Australian dollar was around 4 per cent below its early 2014 levels, notwithstanding significant falls in commodity prices over the intervening period. The depreciation of the Australian dollar against the US dollar and renminbi had been partly offset by its appreciation against the yen and euro.
That meant that it, “remained above most estimates of its fundamental value, particularly given the significant declines in key commodity prices.”
But, while the Aussie dollar exchange rate has fallen and, “was expected to boost growth over the forecast period,” there was enough spare capacity and lack of wage pressures that “low rates of inflation were likely to be sustained.”
Things like trading partner growth, domestic inflation, consumer and business activity, and Sydney property prices all pointed to a lengthier period before the economy could get back to an above trend level of growth.
So the RBA Board decided to cut rates knowing it would knock the Aussie dollar lower. They did this because the Board, “agreed that a lower exchange rate was likely to be needed to achieve balanced growth in the economy.”
The Aussie dollar was far from the only reason they cut but forcing it lower was certainly one of their primary goals.
You can find the full minutes here.