Daily Commentary BY THE CURVE TEAM –

RBA Minutes Indicate Subtle Shifts

16th of September, 2020

The RBA Minutes for their September meeting imply two key changes in the RBA’s thinking.

Since March the RBA has been content with its policy stance and the role it has played in keeping financial conditions very accommodating. They have consistently said they would maintain this accommodating stance until the economy tends towards full employment and inflation towards 2-3%.

The first key shift in the RBA’s thinking is that further easing may be required. According to the Minutes, the RBA will ‘continue to consider how further monetary measures could support the recovery’.

Expanding the yield curve target out beyond 3 years or lowering the cash rate further to 0.10% are being touted as the next forms of easing. The RBA gave no indication of their preference.

The second key change in the RBA’s rhetoric was around the Australian Dollar. In previous meetings the RBA had emphasised that the Australian Dollar was fairly valued and foreign exchange intervention was entirely off the cards.

The RBA re affirmed that they believed the dollar was fairly valued but added that ‘a lower exchange rate would provide more assistance to the Australian economy in its recovery’. Further easing of monetary policy would encourage a depreciation of the exchange rate, which would facilitate this faster recovery the RBA refers to.

Influencing the exchange rate is the monetary policy stances of other countries. The US’s shift to average inflation targeting could have the Federal Reserve expand their bond buying programme even further, which would compress their yields. The Reserve Bank of New Zealand are toying with the idea of negative interest rates, which if they follow through with would likewise lower their yields.

Both the US and New Zealand examples were referenced in the Minutes and would leave Australia’s interest rates relatively higher. This would increase the attractiveness of investing in Australia and keep the Australian Dollar high. So, in other words, if the rest of the world keep increasing their use of unconventional monetary policy, the RBA could well be forced into a corner to continue to ease their policy stance if they want the Australian Dollar to at least hold its position.

Also, a key driver of the Australian Dollar is China’s demand for our commodities. Earlier in the week we mentioned geopolitical tensions could spill over to China’s demand for our commodities, which would depreciate the Australian Dollar.

Thus far there is little sign of this with China’s industrial sector continuing to drive China’s economic recovery rather than consumption like most of the world. Industrial production was up 5.6% on last year for August while retail sales were down 1.1% on last year. So long as China continues to buy our commodities to build there will be upward pressure on the Australian Dollar.

House prices for the quarter were down 1.8%, which was more than the expected 1.3% fall. Weekly data suggests prices have stabilised across the country though. 8% of loans remain on deferral, with 40% of those collecting at least some form of payment.

Josh Stewart

Client Relationship Manager