The wait-and-see stance of monetary policy has been confirmed, again, by the minutes of the Reserve Bank of Australia’s March 5 board meeting.
And a speech by a senior RBA official suggests business investment will be crucial to any further interest rate cuts.
The central bank left the cash rate at three per cent, as widely expected, and reiterated its view that the outlook for on-target inflation gave it room to cut again if necessary.
And it took the additional step, in the minutes released on Tuesday, of acknowledging that more cuts really may be needed.
“At this meeting, the board’s assessment was that, while further reductions may be required, on the information currently to hand it was appropriate to hold rates steady, and to assess further developments over the period ahead.
Some of the factors likely to affect the decision were discussed early on Tuesday in a speech by RBA deputy governor Philip Lowe.
The speech dealt with what’s come to be known as the rebalancing of the economy – structural change forced on the economy by a dominant mining sector and high exchange rate.
Dr Lowe said monetary policy could not stop structural change from happening and should not try to, but could only play the hand the global economy has dealt Australia.
“We can help ensure that aggregate demand and supply remain in broad balance, so that when firms are making employment, investment and production decisions they can do so with reasonable confidence about the health of the overall economy,” he said.
He said lower interest rates should work at first by boosting asset prices, housing market conditions and consumer confidence and lowering the exchange rate.
He said lower interest rates “are doing their work broadly as expected”.
The failure of the exchange rate to fall was the “one notable exception” although he said – reiterating earlier RBA comments – that interest rates has been adjusted to offset the contractionary effects of the high Australian dollar.
But whether rebalancing will proceed smoothly remains unclear.
“As mining investment inevitably peaks and then gradually declines, a critical question for the outlook is the strength of this expected pick-up in non-mining investment,” Dr Lowe said.
There is evidence of such a pick-up, he said, referring to the quarterly survey of business capital spending intentions published by the Australian Bureau of Statistics late in February.
But the evidence so far is only “tentative”.
“Whether the increases will be sufficient to offset the expected lower levels of mining investment is something that we will be watching very carefully over the months ahead,” Dr Lowe said.
There are other factors likely to affect the policy, but the RBA is making it clear that this issue will be critical.
So, unless the economy takes an unexpected turn for the worse, it’s likely the RBA will stay on the fence until the next round of capital spending survey data in late May.
