It would seem that the door is still open to further interest rate cuts following the release of the minutes to the Reserve Bank of Australia's latest Board meeting.
When the Board met a fortnight ago, it decided to leave the nation's cash rate unchanged at the record low 2 per cent after slashing it by 25 basis points in both February and May. Indeed, the result was broadly in line with what the market had expected although the market has since declared the likelihood of another one, or even two interest rate cuts in the near future.
The calls for further easing in monetary policy have largely resulted from the recent global economic uncertainty regarding a potential 'Grexit' and China's sharemarket meltdown, together with crashing commodity prices.
China and Greece
Prior to the Board's latest meeting, the RBA's chair, Glenn Stevens, had stated that should Greece fall out of the Eurozone, the direct impact on the Australian economy would be somewhat limited, although we were at risk from potential spillover effects through the global market. Investors were also fearful that China's crashing sharemarket could spill into the real economy which could impact the Asian nation's growth, and thus, impact their demand for our resources.
Indeed, these fears resulted in plummeting commodity prices with iron ore falling to a new low of just over US$44 a tonne. Copper and oil prices also plummeted.
In today's minutes, the RBA said: "Members noted that the recent volatility in Chinese equity markets and potential spillovers from developments in Greece would require close monitoring" (emphasis added).
Employment
Interestingly, the RBA also shed some light on why Australia's labour market has improved somewhat despite weakness in the broader economy. The RBA attributed this to stronger employment growth compared to population growth, which has fallen as a result of lower migration figures (partially due to a slowdown in the mining sector).
Nonetheless, the RBA expects inflationary pressures to remain "well contained" with indications that the stronger-than-expected growth experienced in the March quarter had not carried through to the June quarter. This provides the RBA with the ability to cut rates further should it see the need, although raging house prices in Sydney still remain a primary concern for the Bank.
Australian Dollar
The Reserve Bank has long been targeting an exchange rate of US75 cents – a level that has finally been achieved. The dollar is currently worth US73.57 cents, according to Yahoo! Finance.
However, it said that the dollar's decline against a basket of currencies had been much more modest compared to its depreciation against the US greenback, noting that "the exchange rate had thus far offered less assistance than would normally be expected in achieving balanced growth in the economy." It added that further depreciation is "both likely and necessary".
Indeed, some economists believe that the dollar will trade at US70 cents by the end of the year, while some see it falling below US60 cents as a result of crashing commodity prices which could certainly force the RBA into further easing in monetary policy before the end of the year.
The S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) rose strongly after the minutes were released with strong gains coming from both Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd. (ASX: NAB) – both of which would benefit in from even lower interest rates.
