Australia Monetary Policy Meeting Minutes

Release Explanation: Changes in rates affect interest rates in consumer loans, mortgages, and bond rates. Since short term interest rates essentially reflect the return on holding a currency, rate decisions usually affect the exchange rate of the Australian Dollar. “Increases in rates, or even expectations for increases, tend to cause the Australian Dollar to appreciate, while rate decreases cause the currency to depreciate”, Trade Team members said. This is a detailed record of the recent interest rate meeting. This release is very important for traders to discern the RBA’s stance on monetary policy and hints of future rate shifts.

Trade Desk Thoughts: The following reasons were given for the RBA’s decision to lower interest rates by 25 basis points.

· Output in Australia’s trading partners, weighted by their share in world GDP, appeared likely to have declined by about 3% over the year to the March quarter.

· Output had declined by 0.5 per cent in the quarter, though GDP rose by 0.3 per cent over the course of 2008. Non-farm GDP had been somewhat weaker in the quarter, and higher output in the farm sector had supported overall GDP. The latest set of indicators suggested that GDP was likely to have fallen again in the March quarter.

· Retail sales had fallen in February, but, as this had followed strong growth in the previous two months, the level of sales was still higher than prior to the fiscal stimulus late in 2008. The year-ended growth of retail sales in New South Wales was now approaching that of the rest of the country, after a period of over a year in which it had lagged considerably.

· Household spending had been supported by a sharp decline in interest payments. As a share of household disposable income, these had fallen by several percentage points in the past six months. However, household net worth was estimated to have fallen further in the March quarter.

· Members noted that consumer sentiment in Australia had fallen by significantly less than the average for some major economies, where indicators of consumer sentiment were now well below those seen in the early 1990s. This was not the case in Australia.

· In the housing sector, indicators pointed to weakness in building activity in the first half of this year, though increasing demand from first-home buyers was supporting parts of the established housing market. Building approvals had increased in February, but remained at low levels.

· Business conditions were weak in the early months of the year. Activity in the manufacturing sector remained well below average levels. Business debt funding had fallen, with businesses repaying debt in net terms in the past two months, for the first time in 15 years

· It was clear from the information that had become available over the past month that the very sharp contraction in the global economy in the final quarter of 2008 had continued during the first few months of this year. Forecasts for growth in both the industrial and emerging economies for 2009 and 2010 accordingly had been marked down further.

· Conditions and sentiment in global financial markets had continued to improve gradually over the past month. The improvement, which had included a sizeable rally in equity markets, had been helped by the announcements of more detailed plans for a resolution of banking system difficulties in the United States and other major countries.

· Domestically, information over the past month had confirmed that the economy had contracted in the December quarter, though the fall in GDP had been considerably less than that of Australia’s trading partners. Data for the March quarter thus far suggested another weak outcome for demand and output, though members noted that consumption had held up relatively well following the boost to spending late in 2008.

Forex Technical Reaction: The aussie has weakened slightly since the release of the minutes and is currently trading just below the 0.7000 level. The pair may tread water until RBA Governor Stevens speaks later tonight.