RBA minutes a reminder?

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22 May 2017

“Taking into account all the available information and the updated forecasts, the Board’s assessment was that maintaining the current accommodative stance of monetary policy would be consistent with achieving sustainable growth and the inflation target over time.”

This sentence is from the final paragraph of the RBA board minutes of its May meeting. Minutes from recent RBA meetings have not mentioned the stance of monetary policy, which in this case is described as “accommodative”, although this term was last used in early 2016. Is this a reminder by the RBA a cash rate of 1.50% is historically low and thus out of the ordinary?

The last time the RBA minutes referred to “accommodative” monetary policy was in March 2016. The reference was dropped in April when the Board made a very clear reference to low inflation which “would provide scope to ease monetary policy further, should that be appropriate to lend support to demand.” The official rate was then cut in May 2016 and then again in August the same year. From this, one could draw the conclusion the cash rate may be cut again but few economists expect this. The RBA Board is plainly concerned about rampant property prices in Melbourne and Sydney. In any case, what would be the difference for households and businesses if the official rate was 1.25% instead of 1.50%?

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The U.S. Fed has begun its rate-raising cycle in earnest and another rate rise is expected in the U.S. in June. Analysis of the correlation between the official interest rates of the U.S. and Australia over the period from January 1990 and May 2017 indicates a 60% correlation when the U.S. rate is lagged by 7 months. In other words, when the U.S. changes its official rate, seven months later, there’s a good chance Australian rates will change in the same direction too. While a 60% correlation leaves quite a bit of room for other influences on the RBA rate, it is high enough to be hard to ignore.