- Issues outlined in the latest RBA minutes are largely a reaffirmation of the matters and outlook portrayed in the November RBA statement on momentary (SMP) outlining the justification for the early November RBA rate cut of 0.25% which took the cash rate to 4½%.
- There were no indications in the latest minutes that the RBA will refrain from further policy easing if the global economic and financial outlook further deteriorates.
- In moving to cut rates in November, the RBA said that the case for a rate cut had been boosted by 1) the material changes to the underlying inflation outlook (to a much more benign outlook than previously thought); and 2) the intensification of the downside risks to the global economic outlook via the deteriorating European economic and financial outlook.
- RBA concluded that these factors buttressing the case for some easing in the “slightly restrictive stance of monetary policy that had been in place over the past year” to a “more neutral stance of monetary policy” more than offset substantive factors which argued for the maintenance of an unchanged “slightly restrictive” policy stance. These factors were the continuing “expansionary effects of the high terms of trade” and the associated mining investment boom.
- The central bank noted the continuing large differences in activity levels across sectors (i.e. non‑mining areas experiencing much more tepid growth) and that this has continued to complicate the task of assessing the strength of the overall economy.
- Near term growth was likely to be weaker than expected earlier in 2011,reflecting the Europe’s financial turmoil and its deleterious effect on local business and household confidence.
- The RBA still sees Asian growth and high commodity prices as highly favourable for Australian exporters and the economy.
November RBA Board minutes are largely as expected and justify the case for the 0.25% rate cut after this month’s RBA Board meeting. The minutes reiterated the recently released downward revisions to the central bank’s near term GDP and inflation forecasts (i.e. in the November SMP).
The minutes underscore once again that previous RBA concern in H1 2011 about upside risks to inflation has morphed into anxiety about possible downside risks to growth ahead.
Indeed, the RBA continues to warn that there remain significant risks to global growth, with a very disruptive outcome in Europe still in the mix. If such an outcome did occur, the Bank warns that the world economy would be considerably weaker than the central scenario (of 4% growth in the next couple of years), notwithstanding the ability of policymakers in Asia to respond to a slowdown in their own economies. The bottom line of these warnings is that the central bank will cut rates further if it needs to in the event of a further deterioration in global economic and financial outlook.
The above information is courtesy of CBA economics departments