Another cash rate cut could be on the cards but the Reserve Bank would rather see a lower Australian dollar do the heavy lifting to boost the economy.
The RBA said it would not close off the possibility of cutting the cash rate again but decided to hold steady at the record low of 2.5 per cent in December to allow previous cuts to continue filtering through the economy.
“The Board’s judgment remained that, given the substantial degree of policy stimulus that had been imparted, it was prudent to hold the cash rate steady while continuing to gauge the effects of earlier reductions, but not to close off the possibility of reducing it further,” the RBA said in the minutes of its December board meeting, released on Tuesday.
Benign inflation and the still-high Australian dollar were cited as factors that would allow another cut if need be.
“While the exchange rate had depreciated over the month, members agreed that it remained uncomfortably high and a lower level would likely be needed to achieve balanced growth in the economy,” the RBA said.
The RBA wants a lower currency, rather than another rate cut, and their attempts at “jawboning” the Australian dollar lower were having some success, Commonwealth Bank economist Diana Mousina said.
“At this stage, we do not think that another cash rate cut is appropriate,” Ms Mousina said.
“We still characterise the RBA as `reluctant rate cutters’ who would prefer to see any easing in financial conditions to come via a lower currency than through lower interest rates.
“As well, the low level of interest rates continue to work their way through various parts of the economy.”
The Australian dollar has fallen below 90 US cents since the RBA’s December 3 meeting, trading at around 89 cents since Friday morning, but governor Glenn Stevens said last week that a more appropriate level for the currency would be around 85 US cents.
It’s expected that the Australian dollar will fall further when the US Federal Reserve begins tapering its economic stimulus program.
ANZ chief economist Ivan Colhoun said low interest rates were doing all they could – the rest is up to the Aussie dollar.
“The parts of the economy that can respond to lower interest rates are responding, especially housing,” Mr Colhoun said.
“The slowdown in mining investment will not be affected by interest rate settings, while the Australian dollar will be affected more by developments in overseas monetary policy settings and quantitative easing, than by Australian interest rate changes.”
He said the RBA was open to the possibility of further rate cuts, but described this as a “very mild `non-active’ easing bias”.
