Strong Aussie dollar helped economy says RBA

It’s a double serve from the Reserve Bank of Australia (RBA) this week with the release of the minutes of the February Board meeting and also a speech by the Deputy Governor Dr Phillip Lowe.

The minutes, which are released a fortnight after the rate decision is announced, as always shed some light on the Board’s view of the current and expected future state of the Australian and global economy. Perhaps the most important takeaway from the minutes is that the RBA appears comfortable to keep the cash rate at the historically low 3%, while it waits to see whether capital expenditure from the non-mining sector can take up the slack from a slowing mining sector.

The minutes stated that mining investment “appeared to be approaching its peak” and that “non-mining business investment had, to date, remained subdued.” It is far from a certainty that this smooth transition will occur, with the RBA acknowledging that if needed, there is room to further cut rates to encourage non-mining sector investment.

While the minutes didn’t raise eyebrows, the Deputy Governor’s speech did!

Dr Lowe’s speech highlighted – from a macroeconomic standpoint – the benefits the Australian economy had derived from a high Australian dollar (AUD). He suggested that if Australia had not experienced a high exchange rate, the economy would have been at risk of overheating and higher inflation. Intuitively, Dr Lowe is perhaps suggesting that, had the AUD been weaker, the increased AUD denominated profits that would have flowed to BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO) alone, could have been enough to push inflation above target levels.

Dr Lowe’s second point related to household savings. The net savings ratio has risen from 0% to 10% over the last decade which has effectively removed $90 billion per year from household spending. Once again, the Deputy Governor is viewing things from a macroeconomic point of view and suggests this increase in the saving rate stopped the economy for “significant overheating”. Retailers such as Harvey Norman (ASX: HVN) and David Jones (ASX: DJS) have of course been struggling with a cautious consumer, however had the extra cash been bouncing around the economy, it could have put further pressure on inflation, ultimately forcing the RBA to raise interest rates to tame it.

Foolish takeaway

While having a broad understanding of economic issues is important for investment success, sometimes focussing too intently on the multitude of economic indicators and possibilities can cause investors to “lose sight of the forest for the trees”.

Got your sights set on Oil, copper, and gold which continue to be in high-demand — their popularity doesn’t look to be slowing. We’ve uncovered three companies poised to benefit from the rising prices of these commodities. Get our brand-new report — “3 High-Risk/High-Reward Resources Stocks” — FREE!

More reading

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

The 5 mining stocks we’re recommending in 2019…

For decades, Australian mining companies have minted money for individual investors like you and me. But if you believe the pundits and talking heads on TV, those days are long gone. Finito! Behind us forever…

We say nothing could be further from the truth. To earn the really massive returns, you’ve got to fish where others aren’t fishing—and the mining sector could be primed for a resurgence. That’s why top Motley Fool analysts just revealed their exciting new research on 5 ASX miners they believe could help you profit in 2019 and beyond…


The best way we see to play the global zinc shortage… Our #1 favourite large-cap miner (hint: it’s not BHP)… one early-stage gold miner we think could hit the motherlode… Plus two more surprising companies you probably haven’t heard of yet!

For free access to our brand-new research, simply click here or the link below. But be warned, this research is available free for a limited time only, and we reserve the right to withdraw it at any time.

Click here for your FREE report!