Four takeaways from the RBA February board meeting minutes

February 18, 2014
Paul Corkill

The Reserve Bank of Australia has released the minutes to its latest board meeting - its guide to the developments it's seeing in the Australian economy.Here are four things from the February minutes that you need to know.1.The inflation 'puzzle'Although inflation in the December quarter had been higher than expected, there were several possible explanations. The Board noted that it was likely the inflation reading contained some noise as well as some signal about inflationary pressures, but also presented something of a puzzle in interpreting the mix of activity and price data.AdvertisementThe Reserve Bank said that it was not clear exactly what caused the sharp rise in fourth-quarter inflation, and canvassed a variety of reasons, such as the impact of a lower Australian dollar, a slower-than-expected impact of slower wages growth, "noise" (such as weather effects on the prices of fruits and vegetables, which jumped up for the quarter) and less spare capacity in the economy.2. Comfortable with the dollarThe exchange rate had also depreciated further since the December meeting. If sustained, a lower exchange rate would be expansionary for economic activity and assist in achieving balanced growth of the economy.As the RBA had done in its board meeting statement and Statement of Monetary Policy earlier this month, it dropped its previous calls for a weaker currency and instead expressed its general comfort with the current levels of the dollar at the time of the meeting (about US87¢).HSBC's head of Australian FX sales Paul Edwards said it was heartening for financial markets to see the Reserve Bank maintain a consistent message about the dollar. He added that the RBA would already be pleased with the extent to which the local currency fell last year, in part assisted by their jawboning on the need for a weaker exchange rate."I don't think they would have thought they would have got the move that unfolded on the back of their talking the currency down without them having to physically intervene via the currency markets or fiscal and monetary policy. So they should be well-pleased with their efforts," Mr Edwards said.3. Jobs market - weak, but it's a lagging indicatorMembers recognised that conditions in the labour market tended to lag economic growth, and that the labour market had remained weak following the period of below-trend growth in activity.The central bank introduced two new elements to its description of the labour market, which has remained soft as the unemployment rate rises. (It is also important to note that when the RBA met, the jobless rate was at 5.8 per cent) It noted that the jobs data was a lagging indicator that might not be reflecting some of the improvements in parts of the non-mining economy.But it also added that while foreign indicators of labour market activity had showed signs of stabilisation, they "remained at low levels and were consistent with only moderate growth of employment in the months ahead"."In past cycles, the RBA has generally held off hiking rates until the unemployment rate begins to fall," HSBC economists Paul Bloxham and Adam Richardson said, adding that while the labour market had continued to weakened, the recent pick-up in demand could see it turn around earlier than expected.4. Stable outlookThe Board would continue to examine the data over the period ahead to assess whether monetary policy remained appropriate, with members noting that, if the economy evolved broadly as expected, the most prudent course would likely be a period of stability in interest rates.The Reserve Bank reemphasised its shift to a neutral monetary policy stance, repeating its "period of stability" phrase. The central bank's concern about inflation is expected to see it stay on hold for some time, with an eye to the next official CPI report on April 23."Given the RBA has only just shifted its rates bias to neutral, we don't expect any change in signaling at least until the May Board meeting when it will release new economic forecasts and have the first-quarter CPI [figures]," Citi economists Paul Brennan and Josh Williamson said.

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