The Reserve Bank of Australia (RBA) today released the minutes from its 4 November board meeting, which are uneventful. The RBA expects the economy to continue growing at a below trend pace over 2014-15, before gradually picking up to an above-trend pace towards the end of 2016. Importantly, there was also no mention of macro-prudential measures to cool the housing market, with the RBA seemingly comfortable about potential risks.
Here’s Westpac chief economist, Bill Evans’, take on the minutes:
The Reserve Bank Board minutes continue to provide a generally downbeat assessment of the Australian economy. Whereas in the past the growth outlook was described as “a little below trend” in these minutes it is explicitly assessed as “below trend over 2014/15” and gradually picking up to an above trend pace “towards the end of 2016”.
The all-important outlook for non-mining business investment remains subdued and the Bank’s liaison continues to point out that significant new investment will not be undertaken until businesses experience a sustained improvement in demand. Ongoing concerns with the impact of fiscal consolidation at all levels of government continue to be apparent. Conditions in the labour market remain subdued although forward-looking indicators are consistent with modest employment growth. However it was likely that it would be some time before the unemployment rate declined consistently (in previous minutes this timing was signalled to be in 2016 although now that timing is more vague). The Bank has raised its inflation forecasts. That reflects the depreciation of the AUD during October. In fact the cumulative effect of the depreciation since early 2013 is expected to add around ½ppt to underlying inflation. However, apart from in the housing market, domestic pressures are expected to remain subdued. Note that in the Statement on Monetary Policy (SoMP) the Bank increased its forecast for underlying inflation to 2¼-3¼% for 2016.
With businesses firmly “awaiting a signal of a sustained lift in demand” the Bank rightly focusses on potential for a lift in household spending. The boost to house prices is seen to be a positive and it points out that retail sales have been stronger in those statements with more house price growth. However, they do point out that expectations for low income growth may weigh on consumption. In that regard the Westpac Consumer Sentiment Index component index tracking consumers’ assessments of their finances relative to a year ago has fallen by 15.7%yr.
While credit extended to investors in housing is noted to have continued to grow at a noticeably faster pace than credit to owner-occupiers the concerns around imbalances in the housing market appear to have possibly eased. Certainly it is pointed out that house price inflation has slowed and whereas in the October minutes discussions between the Bank and APRA on banks’ lending standards are specifically referred to these minutes are silent on that issue.
In the SoMP we were treated to an extensive analysis of the risks associated with the Chinese property market. These points are repeated in less detail in these minutes. The other global development has been the surprise further easing in monetary policy by the Bank of Japan. Boosting monthly asset purchases by the BoJ is interpreted by the RBA as potentially pushing the AUD to an even higher level as foreign capital seeks higher yields.
Of course the minutes repeat the key themes that the AUD remains “above most estimates of its fundamental value” and that “the most prudent course [for policy] was likely to be a period of stability in interest rates”.
Conclusion
These minutes are slightly more dovish than in October. The growth outlook is a little less optimistic while there appears to be less hysteria around the potential risks associated with the housing market. Indeed there is no implication of a substantial intervention by the authorities.
The Bank is clearly in an ongoing ‘wait and see’ mode. We will continue to monitor minutes; statements; and speeches from Bank officials to detect whether a change in attitude towards the steady rate policy is being considered. There is no clear signal in these minutes that such a strategy is being considered. We maintain our call that the next move in rates will be up whilst having considerable sympathy with the Bank that the necessary lift in activity and prospects for growth is still absent in this economy.
