RBA governor Glenn Stevens noted in his statement after this month’s board meeting that a higher Australian dollar was a complicating factor for Australia’s economic recovery and “complicate the adjustment under way in the economy”.
So traders were anticipating the release of the minutes from that meeting as a guide to just how much weight the board was putting on this potential handbrake on growth.
Upon reading the minutes it seems that faced with the possible complication from a stronger exchange rate against the reality of a jobs market which is “noticeably stronger than a year ago”, and liaison which reported retail trading conditions are “generally favourable”, the RBA board has come down on the side of actual conditions facing the economy rather than possible ones.
That is not to say it isn’t watching closely, especially services.
The minutes said:
Growth in net service exports, which was consistent with the pronounced increase in short-term visitor arrivals, had contributed around ½ percentage point to growth over 2015. Members observed that this component of GDP was one of the most sensitive to changes in the exchange rate and discussed the impact of exchange rate movements on the economy more broadly.
Too much Aussie dollar strength would certainly be a complication for this driver of growth.
But the RBA said that the rise in the Aussie dollar had accompanied the recovery in commodity prices and changed expectations about the path of US monetary policy.
Nonetheless the minutes show the board felt an overly strong and “appreciating exchange rate could complicate progress in activity rebalancing towards the non-mining sectors of the economy”.
But the key to the minutes is that the RBA says the Aussie dollar “could” complicate, not “is complicating”. That’s a message that suggests it is alert but so far not alarmed.
If it needs to cut rates because the Aussie gets too high, then it will.
“Continued low inflation would provide scope to ease monetary policy further, should that be appropriate to lend support to demand,” the minutes said.
But for the moment, just like the Aussie dollar strength could complicate the economic transition, so too will rates only be cut if the economy needs it. It’s clear the RBA doesn’t believe either of these preconditons to a cut have yet been met.