The latest RBA minutes are out. This post has a few highlights. The full section on monetary policy is reproduced at the bottom.
“Members noted that the news received on domestic activity over the month was consistent with Australian economic growth being below trend in the June quarter.”
“In contrast, conditions in the housing sector had continued to improve. Auction clearance rates remained high and dwelling prices had increased further in recent months. A number of indicators were pointing to a further recovery in dwelling investment, consistent with the low level of interest rates.”
“GDP growth was expected to remain below trend, at close to 2½ per cent through to mid 2014, before picking up thereafter.”
“The outlook for employment growth was slightly weaker than at the time of the May Statement on Monetary Policy, consistent with the revisions to the GDP forecast.”
“On the future path of Australian monetary policy, domestic financial markets had viewed the lower Australian dollar as reducing the need for the Bank to ease monetary policy further. However, with recent domestic economic data generally weaker than the market had expected, current market pricing implied a 25 basis point reduction in the cash rate at the August meeting.”
“On balance, with growth expected to remain below trend for longer and inflation to remain within the target even with the effects of a lower exchange rate, members concluded that a lower level of the cash rate would better contribute to achieving sustainable growth in demand consistent with the inflation target. Regarding the communication of this decision, members agreed that the Bank should neither close off the possibility of reducing rates further, nor signal an imminent intention to reduce rates further.”
Full section on monetary policy:
Considerations for Monetary Policy
Recent information suggested that the economy was growing at a below trend pace. Indicators of consumer spending had been soft. Borrowing for housing had picked up, as had dwelling prices, and there had been an increase in leading indicators of dwelling construction, but to date this had been moderate rather than strong. Employment growth was continuing, but at a pace below the rate of growth of the labour force, and unemployment had tended to rise. Inflation remained low and, allowing for the effects of the introduction of the carbon price, was around the bottom of the target range. Wages growth was slowing.
The revised staff forecasts were for below trend output growth over the coming year or so, before growth was expected to pick up partly because of the effects of the recent exchange rate depreciation. The path of business investment spending would be affected by the turning of the cycle in resources investment, where indicators continued to suggest that a decline was likely over the next several years. Near-term prospects for business investment outside the resources sector remained subdued, with quite weak levels of confidence across many segments of business. In due course, inflation would be pushed up for a period by the lower exchange rate, but even so was forecast to be around the middle of the target range.
Members noted that there had already been a substantial easing of monetary policy over the previous 18 months. At recent meetings the Board had held the cash rate steady, but had judged that the inflation outlook might afford some scope to ease policy further, should that be necessary to support demand. The forecasts for this meeting suggested no lessening of that scope, but did show a weaker outlook for activity overall. The course of the exchange rate would be important. It had declined since the previous meeting, though remained high by historical standards. It was possible the exchange rate would decline further over time, which would assist in rebalancing growth in the economy, though it would also be affected by developments in other countries.
On balance, with growth expected to remain below trend for longer and inflation to remain within the target even with the effects of a lower exchange rate, members concluded that a lower level of the cash rate would better contribute to achieving sustainable growth in demand consistent with the inflation target. Regarding the communication of this decision, members agreed that the Bank should neither close off the possibility of reducing rates further, nor signal an imminent intention to reduce rates further. The Board would continue to examine the data over the months ahead to judge whether monetary policy was appropriately configured.
The Board decided to lower the cash rate by 25 basis points to 2.5 per cent, effective 7 August.