RBA minutes show board happy to let dollar keep falling

The Reserve Bank of Australia (RBA) today released the minutes of its last monetary policy meeting, on June 2, which saw it keep its policy interest rate, the cash rate, unchanged at 2.75% – balancing concerns over a "subdued" labour market and fears that a weakening currency might feed into increased inflation.

The minutes show the RBA board discussed market reactions to statements made by the US Federal Reserve, describing them as "disproportionate" to the news content in what the Federal Open Market Committee said in its latest communication.

However, despite markets pricing in an earlier increase in the federal funds rate, RBA board members "observed that the level of US 10-year yields, at 2.5%, was still low by historical standards". Australian 10-year bond yields had moved "broadly in line" with those in the US and hit 4% at one point in June, but "spreads on state government debt remained narrow", the board said.

The "most significant change" in the growth outlook over the months leading up to the decision on July 2 was the depreciation of the Australian dollar, though board members "noted that it remained at a high level", the minutes said.

The board expected the depreciation "to add a little to inflation over time, but the forecast was for inflation to remain consistent with the target". The expectation remained for the exchange rate to fall further over time as the terms of trade and mining investment declined. The board saw this in a positive light, as it would "help to foster a rebalancing of growth in the economy".

Given that exchange rate adjustment, and the "substantial degree of monetary stimulus already in place", the board decided its current policy stance was "appropriate for the time being", adding that the inflation outlook, "although slightly higher because of the exchange rate depreciation, could still provide some scope for further easing, should that be required to support demand".