RBA leaves door open for further rate cuts in November meeting minutes

The Reserve Bank of Australia (RBA) released the minutes for its November 5 meeting today, stating that there are signs that low interest rates are working, but did not want to “close off the possibility of reducing [the cash rate] further”.

Board members discussed the “uncomfortably high” Australian dollar and noted that a lower level of the exchange rate would likely be essential to achieve balanced growth in the economy.

CommSec economist Savanth Sebastian notes that policymakers are hoping that the super stimulus provided by low rates will be sufficient. Conversely, if the stimulus is not adequate, the RBA will likely consider a further interest rate cut.

Sebastian added that at this stage, the RBA has adopted a “wait and see” mode while waiting for a clearer picture of how the domestic business and household sectors respond in the Christmas spending period as well as the early part of 2014.

The Statement of Monetary Policy, released a fortnight ago, confirmed modest downgrades to near medium term economic growth forecasts. Inflation is expected to remain in the 2-3% target band as well.

Sebastian reiterates that the RBA has provided the economy with substantial stimulus in the last year. While the RBA remains cautious with its approach, its prior rate cuts have only just begun to impact the economy. He does not expect any changes in policy settings over the next few months.

HSBC chief economist (Australia & New Zealand) Paul Bloxham said in a recent report that the RBA has noted they are seeing an improvement in conditions that extends beyond a pick-up in the housing market.

While the RBA explores the possibility of cutting rates further if the Australian dollar does not fall, Bloxham believes the AUD will fall modestly over 2014 and there will be no need for the RBA to cut rates further.