RBA Minutes - June Board Meeting

The RBA released the minutes 0f their June board meeting yesterday. The closing paragraph is below:

"Monetary policy had been eased significantly, and budgetary measures were also providing significant support to demand. Indications were that these policies were having some impact, though the full effects would take time yet to be seen. Board members did not see a pressing case for any further action at this meeting, though they viewed the inflation outlook as affording scope for some further easing of monetary policy, if that were to be needed to support demand at a later stage. Accordingly, members judged that maintaining the current stance of monetary policy for the time being would be consistent with fostering sustainable growth and low inflation, and would leave adequate flexibility to respond to developments as needed over the period ahead."

They have clearly justified the current pause by acknowledge further easings are a possibility. Here are some reasons why they may still need to ease:

* Australian dollar strength reduces stimulatory effect from better export performance due to a lower dollar

* If inflation drops this will result is real rates being higher than the economic circumstances would warrant (may also cause further appreciation in AUD)

* Business investment will continue to fall away due to tight credit.

* Globally the economic situation remains quite dire

* Rising unemployment in the latter part of '09 could be a significant drag on the economy

* Counteract banks using increased funding costs as an excuse to raise rates. The RBA do NOT want the public to get the impression variable rates are on the way up. CBA's recent 10 point move may do this.

LONG TERM RATES
Banks in Australia have raised long term rates due to wholesale rates going up. This has a minimal effect on our economy and the RBA is unlikely to be worried by it. In the US however long rates have been going up as well. Unlike Australia US mortgage rates are based on long term yields. The disaster we're currently experiencing is as a result of a housing collapse in the US. The last thing they need at the moment is to place the extra burden of higher rates on people struggling with their mortgage payments. It's likely to keep the US economy down for longer.