From Bill Evans:
The new Governor of the Reserve Bank Philip Lowe has used the minutes to the December Board meeting to clearly lay out his delicate policy challenge over the next year.
We have been used to monetary policy being largely driven by changes in the inflation outlook or prospects for economic growth. While these factors remain entirely relevant for the Bank, the minutes note that the Board members took time to assess the policy decisions made since the latest easing cycle began in late 2011. The key issue for discussion was around the impact of lower interest rates on asset prices and borrowing decisions. The definitive quote is: “Over recent years the Board had sought to balance the benefits of lower interest rates in supporting growth and achieving the inflation target with the potential risks to household balance sheets. Members recognised that this balance would need to be kept under review.”
I think this observation, which figures so prominently in the minutes, is signalling that the hurdle to even lower rates which would be aimed at boosting demand is very high. With housing markets in the south east remaining vibrant the risks of further cutting rates appear to be quite concerning for the Board. That view has certainly been a key aspect of our view that the cash rate was likely to remain on hold for an extended period following the (inflation-motivated) rate cut in August.
Observations around the economy were broadly in line with the Governor’s statement on December 6. At the time of the meeting the Board was unaware that the Australian economy contracted by 0.5% in the September quarter. However it was aware that growth in the September quarter was likely to be weak and certainly weaker than had been expected at the time of the November Statement on Monetary Policy. However, as we saw in the Government’s Mid-Year Economic and Fiscal Outlook which printed yesterday the official forecasts (not necessarily exactly held by the RBA) imply average quarterly growth rates of 0.8% in the December( 2016), March ( 2017) and June (2017) quarters. Hence the minutes still refer to “growth picking up to be above potential later in the forecast period”.
The views on the labour market are less confident than we saw in the last set of minutes – “There was still considerable uncertainty about the momentum in the labour market”. Having noted this quote it is however interesting that the detailed discussion on the labour market seeks to align the fall in the unemployment rate with a similar hours-based measure, providing more credibility to that fall.
The commentary on the housing market remains upbeat while recognising that there was considerable variation across the country and between houses and apartments.
There is also some positive commentary around the consumer. We now know that consumer spending in the September quarter was well below average but the minutes point out that since then retail sales have grown at an above average pace and liaison with retailers suggested that trading conditions had remained “steady”.
The minutes are also seeking to paint a better picture for non-mining investment than the downbeat capital expenditure survey that printed in late November – “Over the past few years the national accounts had tended to report stronger outcomes [than the capex survey]”.
The commentary around China remains unchanged with activity being supported by accommodative policy although longer term risks associated with rising debt remain elevated.
The minutes had no real insights into the outlook for the US or markets. Uncertainty around Mr Trump’s policy agenda remains the challenge.
Conclusion
With the negative GDP print for September not being known at the time of the meeting this was always going to be a difficult set of minutes to write. In the event the Board has chosen to highlight in the minutes aspects of the discussion that provide a reasonably upbeat assessment of the economy: growth is expected to bounce back; spare capacity in the labour market, while ongoing, appears to have been reduced; the housing market has strengthened; consumer spending and non- mining investment prospects have improved..However of most significance is the policy commentary that, I believe, implies a fairly clear signal that monetary policy is now representing asymmetric forward risks with the benefits to spending from the lower rates not compensating for instability in asset markets. Of most concern here are the elevated levels of household debt.
It has been Westpac’s view for some time that rates are likely to remain on hold through 2017 and 2018 and the discussion in these minutes gives no reason to qualify that view.
I’ll give you one, Bill: the economy.
