Minutes of the last Reserve Bank Board meeting suggest that policymakers are increasingly concerned about the strength of the domestic economy. While the minutes suggest a neutral monetary policy stance with rates appearing set to remain on hold, the door has been left open for interest rate cuts if it is deemed necessary.

The European debt crisis dominated discussion and seems to be the key factor in the more open stance when it comes to interest rates.

Minutes from the Reserve Bank Board meeting:

“Conditions in global financial markets had continued to be very unsettled, with uncertainty increasing about both the prospects for resolution of the sovereign debt and banking problems in Europe and the outlook for global economic growth.”

“The downside risks from developments in financial markets had been the main focus of the IMF's recently published World Economic Outlook, which had reported that the global economy was in a ‘dangerous new phase’ and that downside risks to activity had increased noticeably.”

The next batch of key inflation data, in late October, is likely to give Reserve Bank Board a better picture of the inflation landscape. While the inflation rate is of key focus, it is unlikely interest rates will be cut in November purely on a lower inflation environment. Rather the European sovereign debt crisis will be the dominating factor that will decide if interest rates are cut by 0.25% on Melbourne cup day.

Overall, the Reserve Bank Board minutes paint a mixed picture of the Australian economy. The mining sector continues to dominate the growth outlook with a strong pipeline of investment, however conditions remained weak in the manufacturing, construction, wholesale and retail sectors. In addition, Board members noted the softer housing market conditions and pick up in the rental vacancy rate across Australia.

Minutes from the Reserve Bank Board meeting:

“The housing market remained subdued, with housing prices having fallen by 3 per cent over the year to August …..the measure of the national rental vacancy rate had edged up in the June quarter, with increases in all cities except Perth, although the national vacancy rate remained below the long-term average rate. Growth in housing credit remained subdued, with annualised growth of around 5 per cent in the three months to August”

With so much data and diverging economic trends, Board members don’t appear to be entirely comfortable at present, wondering what the right move is at the current time.

Minutes from the Reserve Bank Board meeting:

“Members believed that an improved inflation outlook, if confirmed by further data, would increase the scope for monetary policy to provide some support to demand, should that prove necessary. Members noted that financial conditions had already eased somewhat, with interest rates for some housing and business loans declining slightly because of increased competition and the fall in funding costs in financial markets. The exchange rate had also declined somewhat from the very high levels of a few months ago.”

Clearly the Reserve Bank Board has no need to jump either way on interest rates, but if rates were to decrease in the short-term it would be because of the Europe debt crisis. The lack of momentum in the domestic economic and the heightened risk of further weakness in the global economy certainly adds to the chance of a rate cut in coming months - the inflation data next week will be provide policymakers with a better picture of the economic landscape.


James Malliaros
Financial Planner
Authorised Representative No. 291633

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