RBA cautious about ‘significant’ uncertainty in the economy

by Julia Corderoy20 Aug 2014
Interest rates won’t be rising any time soon, as the Reserve Bank of Australia remains wary of Australia’s economic outlook. 

In the minutes of its August 5 board meeting released on Tuesday, the board noted there was “a significant degree of uncertainty about the outlook, given the number of forces working in different directions.” 

As such, the cash rate is most likely to remain on hold at 2.5%, where it has been at its record low for a year now.

“The Board judged that monetary policy was appropriately configured and that, on present indications, the most prudent course was likely to be a period of stability in interest rates,” the RBA said.

The central bank is remaining subdued, as it waits to see how the economy rebounds from the mining boom. Growth was above average in the March quarter due to strong growth in mining exports and a pick-up in non-mining activity, however, the June quarter saw little change in mining exports and mining investment continue to drop. Meanwhile, non-mining activity tapered off.

“Indicators of investment intentions in the non-mining sector were showing signs of improvement since the latter part of 2013, although liaison suggested that businesses were reluctant to commit to major new investment projects until they perceived a sustained pick-up in demand,” the RBA said.

Monetary policy has remained and will continue to remain accommodative to support demand. The RBA noted that credit growth had lifted and housing prices have remained robust. But despite the low cash rate, the exchange rate has remained high.

“…the exchange rate remained high by historical standards, particularly given the notable decline in the prices of some key commodities, and hence was offering less assistance than it might in achieving balanced growth in the economy,” the RBA said.