Reserve Bank maintains stability mantra

by Julia Corderoy17 Dec 2014
The Reserve Bank has confirmed a steady path for interest rates in its final Board meeting minutes until the New Year, released yesterday.

Despite speculation over further cash rate cuts next year, the minutes of the December Board meeting confirm that the central bank still believes that the current stance of monetary policy continues to be “appropriate for fostering sustainable growth in demand and inflation outcomes consistent with the target”.  

This comes as no surprise after governor Glenn Stevens said last week that he believes the best way to foster dwindling consumer confidence in our economy is to promote stability.

“In my view, over the past year or so, I have been asking myself what can we do that will be most conducive to supporting confidence, predictability, the sense that people can make some plans for their business, their own life, whatever it might be. And the view I came to pretty early on was: what we should be doing is giving a message of stability and predictability insofar as we can,” he said in an interview with the AFR.

In the minutes, the central bank once again reiterated the need for an even lower Australian dollar despite the fact that the currency has recorded a considerable fall in the past few months. The minutes noted that the “Members agreed that further exchange rate depreciation was likely to be needed to achieve balanced growth in the economy”.

Interestingly, the Reserve Bank also noted that markets were pricing in modest rate cuts in the early part of 2015 and they discussed the likely scenarios that would result in a rate cut.

“Financial market pricing indicated that the Board was expected to leave the cash rate unchanged at the December meeting, with some chance of an easing in 2015,” the minutes noted.

However, the ongoing slide in the Australian dollar at present has made the bank more comfortable to keep rates on hold.

While the Board noted that the housing market has buoyed consumer consumption, members noted that "subdued labour market conditions were likely to weigh on consumption growth and consumer confidence more generally".

The most recent statistics released by the Australian Bureau of Statistics revealed that the unemployment rate increased to 6.3%. While this could fuel the argument for further rate cuts in the New Year, Savanth Sebastian, economist for CommSec, says it is not likely.

“If unemployment were to lift markedly then a further rate cut may take place. But forward looking labour market indicators suggest jobs growth should improve over 2015. Job ads are almost 9% higher than a year ago and are now holding at 20-month highs. In addition the lift in housing activity will continue to play a significant part in driving activity and employment over the coming year,” he said.

Sebastian maintains his view that the Reserve Bank will be keep rates on hold over the first half of 2015 before a likely rise in the second half of the year, if the economy pans out as expected.

The next Reserve Bank Board meeting will be held on Tuesday 4 February 2015.