Early this month, the Reserve Bank of Australia (RBA) held a monetary policy meeting and became the first major central bank to slash interest rates. In the accompanying monetary policy statement, the officials argued that the rate cut will help stabilize the economy and support the employment situation in the country. They also expected it to stimulate inflation. Today, the bank released the minutes of this meeting.
On the global economy, the members noted that the ongoing trade war between the US and China had led to slow growth in the manufacturing sector. This is because supply chains have been disrupted and the amount of goods exported and imported has slowed down as well. At the time the meeting was held, the US had threatened heavy tariffs on Mexico and India. The bank noted that while the first quarter GDP data for US and Japan was stronger than expected, the domestic demand and investment intentions in Japan had slowed down. Wage growth continued in the developed economies while inflation had remained being subdued around the world. The core inflation has been below the target in the three major advanced economies.
On China, the most important trading partner of Australia, the indicators of activities moderated in April. This was partly because of the slow growth in the fixed asset investments, sharp decline in manufacturing investments, and a decline in infrastructure investments. This has partly been caused by the changing tone on trade.
On Australia, the members noted that the business and consumer sentiment have been broadly stable with the investments in the mining sector close to its trough. There was modest growth in the non-residential building investments. They also discussed the implications of the low interest rates. These rates leads to a decline in the interest that people and companies pay on their debt. However, they also reduce the interest income from interest-bearing assets like term deposits. On the latter, the most people to be affected are the elderly, who rely mostly on the interest income.
As the central bank has warned before, the conditions in the housing market in Sydney and Melbourne remains being weak. The declines in house prices has also continued in Perth. The decline in house prices is a major issue because it leads to weak investments in the sector. It also leads to reduced net worth of individuals. On interest rates, the minutes said:
Given these considerations, members considered the case for a reduction in the cash rate at the current meeting. A lower level of interest rates would support growth in the economy, thereby reducing unemployment and contributing to inflation rising to a level consistent with the target.
In response to the minutes, the Australian dollar declined sharply against the USD as shown below. The currency reached the lowest level since January.
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