Late evening yesterday in New York, RBA Governor Glenn Stevens gave a speech to the American Australian Association titled “The World Economy and Australia“. The RBA Governor took this opportunity to verbally talk down the Australian Dollar, especially by the following comments:
- So interest rates should be quite accommodative and the question of whether they should be reduced further has to be on the table
- The Board has, moreover, clearly signalled a willingness to lower it even further, should that be helpful in securing sustainable economic growth
- The Australian dollar has declined and will very likely fall further yet, over time
The markets instantly reacted to the speech and the above comments with the Australian Dollar falling sharply across the board. In our previous commentary we had noted that any little sign of weakness or verbal rhetoric from the Central Bank will be seen as a reason to sell off the Australian Dollar and the recent moves yesterday is yet another one such incident where the markets are trying to run ahead into pricing another rate cut in May.
RBA – March Monetary Policy meeting minutes
With the main risk of the speech done with, the markets had the monetary policy minutes due earlier this morning.
On Domestic Factors
- The board recognized that the December quarter GDP grew a below trend pace at 0.5%
- Housing markets continue to grow at an above average trend with housing credit growing at 7% annualized while credit to investors grew at a little over 10%.
- The RBA noted that strong growth in the housing markets will continue to grow in the coming quarters
- While unemployment rate continues to improve, the board noted that growth was still below par and that there was still considerably slack in the labor markets.
On Global Factors
- The RBA board is of the view that the FOMC would most likely hike rates towards the end of the year
- On the current Greece/Eurozone crisis, the RBA notes that there was considerable risk that Greece would not get the emergency assistance to cover its liquidity needs, but that the contagion seems to be negligible to other periphery countries
- Modest recovery seen in the Japanese economy but tight
- US economy grows at a moderated pace
- China’s imports of Australian Iron Ore continues to increase
- Slowdown in China has led to reduced demand for steel and other key exports from Australia
On keeping interest rates unchanged, perhaps the most important factors were:
- Members’ overall assessment was that the outlook for global economic growth had not changed significantly over the past month and that it would be supported by stimulatory monetary policies
- Members remained alert to the possibility that the low levels of interest rates could foster imbalances in the housing market
- They also acknowledged that a lower exchange rate would help achieve more balanced growth in the economy
- Further depreciation of the Australian dollar was likely given the recent declines in key commodity prices
- Members also saw advantages in receiving more data, including on inflation, to assess whether or not the economy was on the previously forecast path and allowing more time for the economy to respond to the reduction in the cash rate earlier in the year
Focus will now shift to tomorrow’s inflation data. However, even if inflation falls below estimates or below growth, the RBA is very likely to make no change to interest rates at least at the May meeting, which would see almost 3 months since the previous rate cut, which we believe would be the most ‘appropriate time window’ before which the RBA could act again.