RBA Minutes: Board ready to raise rates if upside risks materialise
Reserve Bank of Australia (RBA) published the Minutes of its July monetary policy meeting on Tuesday, with the key takeaways noted below.
Board ready to raise rates if upside risks materialise.
"Several" board members judged quite possible upside risks to inflation would crystallise.
Other board members saw offsetting downside risks, so there was "some time" to assess incoming data.
Board agreed current cash rate appeared to be working to bring economy into balance.
Board noted it would have data on inflation, jobs and GDP by the September meeting.
Board considered whether to raise cash rate by 25 bps or keep it unchanged.
Cash rate at top end of model- and market-based estimates of neutral, but estimates uncertain.
Possible bringing inflation down faster might do less harm to labour market than first thought.
Upside inflation risks included oil prices, pass-through of cost pressures, data center boom.
RBA would need to see further progress in the data to be certain about inflation returning to target.
But policy appeared sufficiently restrictive to bring inflation to target in a reasonable timeframe.
Staff research suggested a more pre-emptive approach to monetary policy might be appropriate.
Momentum in housing market had shifted with prices falling, could slow economy.
Possible that risks to inflation were balanced, rather than tilted to the upside.
RBA FAQs
The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of governors at 11 meetings a year and ad hoc emergency meetings as required. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2-3%, but also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening.
While inflation had always traditionally been thought of as a negative factor for currencies since it lowers the value of money in general, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Moderately higher inflation now tends to lead central banks to put up their interest rates, which in turn has the effect of attracting more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in the case of Australia is the Aussie Dollar.
Macroeconomic data gauges the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in economies that are safe and growing rather than precarious and shrinking. Greater capital inflows increase the aggregate demand and value of the domestic currency. Classic indicators, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can influence AUD. A strong economy may encourage the Reserve Bank of Australia to put up interest rates, also supporting AUD.
Quantitative Easing (QE) is a tool used in extreme situations when lowering interest rates is not enough to restore the flow of credit in the economy. QE is the process by which the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) for the purpose of buying assets – usually government or corporate bonds – from financial institutions, thereby providing them with much-needed liquidity. QE usually results in a weaker AUD.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Reserve Bank of Australia (RBA) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It would be positive (or bullish) for the Australian Dollar.