The RBA Board Minutes

The RBA released the minutes from their August 4 meeting yesterday. These minutes and recent statements have moved the focus away from whether there will be another easing to the timing of the next tightening. I've pasted the concluding three paragraphs below which suggest to me that the RBA will need to wait at least another two to three months before they can get a good handle on where the economy is at. Crucial will be observing how the economy performs now that the crutch of various stimulus packages has been removed.

Members noted that the cash rate had been reduced to the current very low level in anticipation of very weak economic outcomes. In recent months, members had left open the possibility of further reductions in the cash rate should further downside risks to the economy emerge. Given the recent improvement in the global and domestic outlooks, it now appeared unlikely that this would be necessary. In fact, if the economy evolved as anticipated in the forecasts, the Bank would in due course need to adopt a less expansionary policy stance.

In discussing the timing and process of removing some of the current expansionary policy setting, members noted that it would, when it began, involve balancing two risks. There was a risk of overstaying a very accommodative setting in a recovering economy, particularly when underlying inflation still needed to decline to reach the target. On the other hand, there was a risk of an early tightening choking off confidence and demand prematurely. A particular source of uncertainty was whether the recent growth in household spending was due mainly to the temporary fiscal measures, in which case it would probably soon fade, a more general decline in risk aversion, or the more persistent effects of lower interest rates. Information over the period ahead would be important in judging this.

Having considered the issues, the Board judged the current stance of monetary policy to be consistent with fostering sustainable growth and low inflation, while leaving adequate flexibility to respond to developments as needed over the period ahead.

This morning Assistant Governor Malcolm Edey acknowledged in a speech that there will be an increase in loan defaults in coming months in Australia but that they are unlikely to reach heights experienced in other parts of the world.