The release of the minutes to this month’s RBA board meeting was never likely to be a huge market-moving event given the RBA released its massive Statement on Monetary Policy between the meeting and the release this morning of the minutes.
But, that said, there is a clear sign that the previous desire for a lower Aussie dollar has been replaced with a more sanguine outlook. That reflects the fact that the lower Aussie dollar is doing its job as the shock absorber, helping us all adjust to bumpy economic times.
This change of view is clear in the four key references to the Aussie dollar, or what the RBA calls the “exchange rate” in the minutes.
The RBA highlighted that the Aussie dollar has “depreciated by 5 per cent against the US dollar and by 4 per cent on a trade-weighted basis over the past month, taking the exchange rate to around its lowest level since 2009 on both measures”.
That’s important because RBA modeling showed that a 10% fall in the Aussie dollar, if sustained, is likely to add 1% to GDP growth than otherwise would be the case two years later. The Aussie dollar is down around 22% from this time last year.
So a lower Aussie boosts growth. That’s exactly what the RBA said about its new forecasts on GDP growth:
A downward revision to population growth had contributed to lower forecast growth in consumption and non-mining business investment. The forecasts for growth in public demand and business investment had been revised lower in light of new data. In contrast, the recent exchange rate depreciation had led to an upward revision to net exports.
On Australia’s booming services sector, the RBA highlighted that while Chinese demand might have accounted for the lower iron ore exports, “Net service exports had made a strong contribution to output growth over the past year, supported by the earlier depreciation of the exchange rate”.
That all means that low interest rates and a weaker Aussie dollar are working together to help the economy’s transition.
“Members noted that an accommodative monetary policy setting remained appropriate given the forecasts, while observing that the Australian economy had been adjusting to the shift in activity in the resources sector from the investment to the production phase. This shift had been accompanied by significant declines in key commodity prices and was being assisted by the depreciation of the exchange rate over recent months,” the minutes said.
The lower Aussie is clearly helping the economy. The RBA recognises this and, it seems, is happy with its current levels. Forex traders appear to have got the impression as well.
The Aussie dollar is currently around 0.2% higher at 0.7380.