RBA Minutes: Board watching sustainability of recovery

Posted September 18, 2009

The August minutes for the meeting of the RBA’s Martin Place mandarins reveal that while the Board may have kept the cash rate steady at 3%, all eyes remain firmly on how sustainable this recovery will prove to be.

To quote directly ‘as at the previous meeting, members noted that the policy decision in the near term involved balancing the risk of over-staying an accommodative stance, and that of prematurely tightening and adversely affecting confidence and demand’. In plain English: we’re holding rates steady until we’re sure this recovery is really on.

Interestingly, the minutes revealed a sharp divide between board members who believe Australia’s impressive performance is stimulus driven and those who believe otherwise. Those in the otherwise camp have effectively challenged Wayne Swan’s account of the success of his stimulus measures and noted that ‘it was hard to disentangle the contribution that Asian demand, fiscal stimulus and easier monetary policy had each made to the better-than-expected outcomes’.

And they have a point; for starters RBA interest rate cuts have boosted household budgets by quite a lot more than the Government’s bonus payments. In dollar terms cutting the standard variable mortgage rate from 9.45% to 5.8% sliced $750 a month off the cost of servicing a $300,000 mortgage. And strong growth in China, our biggest trading partner, has dragged up both the commodity markets and regional economies.

On the all important inflation front the Board expected the genie to stay in its bottle for now though governor Glen Stevens warned the likelihood of inflation staying below target ‘looks low’. In other words, the RBA expects inflation to become an issue and that means interest rate hikes. But this won’t happen for a while yet as they’ll probably want to see at least another full quarter of positive GDP growth first.

For now we all await the outcomes of the next RBA board meeting on 6 October. Until then many of us have much more pressing issues to concern ourselves with as the footy final season gets underway.

In other news… in his most rationally exuberant utterance on the global financial crisis yet, US Federal Reserve Chairman Ben Bernanke reckons the US recession, the worst since the 1930s, is probably over. And on the Russia front, a year after the onset of a crisis that has literally hammered it, Russia’s Finance Minister declared his country is also emerging from recession. Nostrovia!