Here’a a couple of bank takes on today’s RBA Minutes. Neither can bring themselves to say that the RBA will cut. And, in truth, there wasn’t much in the minutes to suggest that they will.
I remain less convinced than my stablemate Deus Forex Machina that the RBA will cut on domestic weakness alone by early next year. But that little debate is completely academic given I expect the forthcoming Western recession to force cuts before or around then.
Anyways, I expect both of these banks to be wrong and Bill Evans to enjoy his moment in the sun.
First up is NAB:
Today’s release of the RBA’s September Board minutes reveal that the Board’s medium term concern over inflation persist but they are open to the possibility that recent Australian and international developments might ease some of those concerns.
Having left rates on hold again this month, there is no strong hint that they are on the cusp of cutting, even though they have shifted from a tightening to a more neutral bias.
There’s no doubt that they are watching international developments closely, in the US with uncertain prospects, Europe’s own debt problems (which have escalated further since the Board met on 6 September) and China’s growth that seems to be slowing overall. The RBA has also witnessed some slowdown in the domestic economy with the near term outlook which is now looking “somewhat weaker than had been expected earlier”.
There are hints that they are much less wedded to the view that there is worse news to come on inflation. To paraphrase the RBA’s words, they say they are now watching how recent global/ domestic events are reducing capacity pressures in the economy and in due course, helping to contain inflation. That’s code for downside risks to – but not yet abandonment of – their medium term 3/3¼% August Statement inflation forecasts.
Forecasts for inflation remain at the centre of their policy outlook. In this connection, these minutes note that they have little hard data to judge whether they can be more relaxed about the medium term inflation outlook. So they can do nothing but leave rates steady.
The RBA’s monetary policy stance now looks much less hawkish/ more neutral. They note that the Board is “well placed to respond to evolving global and domestic economic conditions”, so they have ammunition of course to respond to any ugly inflation surprises or to cut if need be. For now, sitting on their hands remains the most likely course.
Since the Board met in September the unemployment rate has risen from 5.1% to 5.3% and Q2 underlying inflation has been revised down to 0.6% from 0.9% (though year to inflation has only been shaded down from 2.7% to 2.6%. The NAB Business Survey for August saw conditions and confidence ease further but consumer sentiment picked up somewhat in September.
Don’t forget also that the resource development train continues to gather speed and iron ore/ coal prices remain at extremely high if not at record levels. Those factors are just as important to growth and inflation as soft retailing and domestically-driven building activity.
In the aftermath of the minutes, the markets have pared back rate cut expectations, with the RBA noting that “technical factors meant that market pricing might not be giving an accurate reading of (RBA rate cut) expectations in the current circumstances”. This pricing currently has a 61% chance of a cut in October (cf a near 100% chance pre-minutes) and 148bps of cuts for the next 12 months (little changed).
