The economy is showing signs of getting stronger and that means more interest rate cuts from the central bank are unlikely.
The minutes of the Reserve Bank of Australia’s February board meeting show the bank is getting more confident in the economic outlook, thanks to the falling Australian dollar and previous interest rate cuts.
The RBA also made it abundantly clear that it won’t be cutting the cash rate in the coming months.
“If the economy evolved broadly as expected, the most prudent course would likely be a period of stability in interest rates,” the RBA said in the minutes released on Tuesday.
In just over two years the RBA has made a series of cuts to the cash rate, taking it to a record low of 2.5 per cent.
The minutes noted that the Australian dollar has fallen three per cent on average against other currencies in two months, and is 15 per cent below its most recent peak in 2013.
“If sustained, a lower exchange rate would be expansionary for economic activity and assist in achieving balanced growth in the economy,” the RBA said.
Economic growth will strengthen in 2014, at a below trend pace, and then increase to above trend growth by mid 2016, it said.
Commonwealth Bank economist Diana Mousina said the RBA was becoming more upbeat about the economy.
“The general tone in the February board minutes is that the RBA is a little more relaxed about growth prospects (both at home and abroad) and a little less comfortable with the inflation outlook,” she said.
“The RBA’s upwardly revised gross domestic product forecasts come from the effects of a lower Aussie dollar stimulating activity in the traded goods and services sectors, a firmer housing construction outlook and clear signs of rising mining export volumes.
“The minutes noted that the central bank’s outlook for the labour market was little changed.”
Ms Mousina expects the RBA’s “period of stability” for the cash rate to last until late 2014, and its next move will be to lift the cash rate.
However Westpac chief economist Bill Evans said another interest rate cut is still a possibility.
The RBA appears to be underestimating two important economic drivers, he said.
“Our forecast that the RBA will need to cut rates further in the second half of 2014 clearly hinges on the likely outlook, at that time, for growth in 2015,” he said.
“Factors that will impact on that outlook will include the ongoing downturn in mining; fiscal consolidation (and the) the impact of a fall in the terms of trade.”
