The Experts

Reserve Bank heralds economic performance

Reserve Bank Board minutes; Speech by RBA Deputy Governor 

Australia has adjusted well to global shocks: Reserve Bank Deputy Governor Philip Lowe says that the Australian economy has adjusted “pretty well” to global shocks.  

Minutes of March 5 Reserve Bank Board meeting: Reserve Bank Board members appear more relaxed citing “positive” global conditions and a domestic economy responding to low interest rates.  

What comments or issues stand out?  

Philip Lowe says that we should focus on achievements: “Our economic performance has been much better than many other countries”. Lowe also sought to highlight the importance of a stronger Aussie dollar in recent years in preventing the economy from over-heating as well as contribution made by rising household saving.  

Deputy Governor Lowe has indicated that non-mining investment “is something that we will be watching very carefully over the months ahead.” Lowe also said that “lower interest rates are doing their work broadly as expected.”

RBA Board members believe that the economy is responding to interest rates at “clearly below normal levels” and it believe “it was likely that this still had further to run”.  

In terms of the household sector RBA Board members noted “that households' net wealth had risen recently” and that low interest rates had helped debt servicing capacity. On the other hand it highlighted weaker business profits and that business failure rates had risen, in part due to the higher exchange rate.  

Board members were hopeful of a pick-up of non-mining investment although “liaison suggested that some firms were investing only to cover depreciation.”

Board minutes highlighted soft conditions in commercial construction but commentary was more positive on the housing market: “Bank's liaison with builders also suggested there had been an improvement in buyer interest in some states.”

The Reserve Bank remained hopeful that higher productivity growth and moderate growth in wages would keep a cap on inflationary pressures. 

Why are the RBA Board minutes important?  

The Reserve Bank releases minutes of its monthly Board meeting a fortnight after the event. The minutes give a guide to Reserve Bank thinking on interest rate settings. 

What does it mean? 

Interest rates are clearly going nowhere for now. The new crisis in Europe, this time over bail-out conditions in Cyprus, means that the Reserve Bank can’t shelve plans to cut rates. But recent positive domestic economic data means has largely ruled out a rate cut for now. Certainly the data isn’t strong enough yet to prompt the RBA to think about hiking rates.  

Things to watch: the Cyprus crisis; next Aussie retail trade and jobs data; any data on non-mining investment; and movements in the Aussie dollar – especially with its new-found “safe haven” status. Philip Lowe has indicated that interest rates have been reduced to lower levels to offset the contractionary effects of the high Aussie dollar.