The Reserve Bank of Australia judged it was prudent to leave the cash rate unchanged at the February board meeting and that rates would remain stable if the economy evolved broadly as expected.
In the minutes of the Feb. 4 board meeting, published Tuesday, the RBA dropped its easing bias but at the same time, provided forward guidance by saying “the most prudent course would likely be a period of stability in interest rates.”
It didn’t provide a timeframe to the stable rate guidance, but said this was conditional on the economy growing in line with its forecasts.
At the board meeting, board members were made aware of the RBA’s latest projections on the economy which was released three days later in the quarterly Statement of Monetary Policy.
According to the updated forecasts which were revised higher from the previous statement in November, mainly due to the effect of a lower exchange rate, “GDP growth was expected to strengthen a little through 2014, though would be likely to be at a below-trend pace.
GDP growth was expected to pick up to an above-trend pace by mid 2016.”
“Underlying inflation was expected to be around 3% over the year to mid 2014 and was then expected to decline towards 2.5%,” the RBA said. The near-term inflation forecast was revised higher also because of the higher-than-expected fourth quarter inflation.
The RBA said the Q4 inflation reading may have contained some noise as well as signals about inflation pressures, “but also presented something of a puzzle in interpreting the mix of activity and price data.”
While the RBA admitted that further weakness in the exchange rate since December was expected to add to inflation for a time, it was also likely that the outlook for slightly slower wage growth would “help keep domestic cost pressures contained over the medium term.”
The RBA said “there were further signs that the expansionary setting of monetary policy was having the expected effects, with more timely indicators having been more positive for consumption, dwelling investment, business conditions and exports.”
The labor market had weakened further but forward-looking indicators of labor demand, such a vacancies and job advertisements, had shown signs of stabilizing in recent months, the RBA said. It noted they “remained at low levels and were consistent with only moderate growth of employment in months ahead.”
Overall, the RBA concluded that substantial degree of monetary policy stimulus was already in placed and it was prudent to keep policy unchanged while assessing the continued impact of that stimulus.
It noted the exchange rate has depreciated further since the December meeting and “if sustained, a lower exchange rate would be expansionary for economic activity and assist in achieving balanced growth of the economy.”
On financial markets, the board discussed two main issues that had came into focus since December – the differing policy paths of the three major central banks and the increased tensions appearing in some emerging market economies.
But it noted that the Fed’s decision to taper has little lasting impact on yields and equity markets in major markets were broadly unchanged since December despite large movements in both directions over the past two months.
It observed financial conditions had become considerably more unsettled in some emerging market economies and some central banks has responded with raising interest rates but some others had been less affects in the current episode than had been the case in mid 2013.