The Aussie dollar rose to a new 10 month high of 77.85 US cents yesterday as the minutes of the April meeting of the Reserve Bank of Australia confirmed the central bank’s concerns about the impact of the higher currency on the wider economy.
But the same minutes also confirmed the market’s belief the RBA has no intention of cutting interest rates any time soon to offset the impact of the higher currency.
“Members noted that an appreciating exchange rate could complicate progress in activity rebalancing towards the non-mining sectors of the economy,” the minutes of the RBA’s April 5 monetary policy meeting reveal. That is what the statement from Governor Glenn Stevens said at the end of the meeting two weeks ago.
The minutes show the board put the appreciation down to the increase in commodity prices as well as fading expectations for an interest rate hike by the United States Federal Reserve this year.
“Oil and iron ore prices had risen noticeably since earlier in the year,” the minutes read.
“The rise in commodity prices had been accompanied by an appreciation of the Australian dollar, which also partly reflected the expectation that US monetary policy would be more accommodative over the coming year than had been anticipated earlier.
"Members noted that an appreciating exchange rate could complicate progress in activity rebalancing towards the non-mining sectors of the economy.”
In the month leading into the April meeting, the Australian dollar rallied 7% in US dollar terms, and 4% on a trade-weighted basis, which measures it against a broader basket of currencies.
The currency reached a new 2016 high against the greenback of US77.85¢ immediately after the release of the April minutes. It had been trading well above 77 US cents for much of the previous day, having bounced a cent and a half as it became apparent that oil prices would not slide with the failure of the Doha producers’ summit on Sunday to freeze production.
Interestingly, the minutes revealed there was another discussion of labour costs.
"Labour cost pressures had remained subdued across a range of measures. The most recent data on enterprise agreements and the national accounts measure of average earnings per hour had confirmed the low growth of wages that was already apparent in the wage price index.
"Nominal unit labour costs had been unchanged for over four years, as growth in employee earnings had broadly matched growth in labour productivity.
“Members noted that subdued labour cost growth had led to low household income growth, but had also enabled businesses to increase employment by more than might have been the case otherwise."
"On all measures, wage growth remained at quite low levels and domestic cost pressures, more generally, remained subdued. Combined with the appreciation of the exchange rate and the low level of inflation globally, this suggested that inflation in Australia was likely to remain low over the next year or two,” the minutes read.
