Tea leaf reading of RBA Minutes

Advertisement


In case you’ve missed it, the RBA released its Minutes from its most recent board meeting this morning, and as usual, the punditry scoured through the document before opining on “certain” rate cuts.

Here’s a selection of comments, analysis and thoughts from the mainstream crowd.

First the reaction from CBA Economics, focusing on the jobs data, with a 0.25% cut expected in May, dependent on CPI data: (emphasis added)

Today’s April RBA Board Minutes indicate that the RBA is prepared to announce a cut in the cash rate at the next meeting on 1 May. We expect a cut of 0.25% to 4.0%, the lowest rate since March 2010. The final hurdle, according to the minutes, is next Tuesday’s QI CPI data. In our view, CPI results of 0.5% for headline and 0.6% for underlying inflation should be sufficient to ensure a rate cut. The RBA does appear to have added an extra rider to this conclusion. Not only does QI inflation have to be well behaved but the inflation outlook has to be “more moderate” as well.

In recent commentary, the RBA has elevated the importance of the monthly jobs data to give a guide as to how the opposing forces at work in the economy are balancing out. While the trend unemployment rate has remained around 5.2% for the last eight months, today’s minutes implied that the labour market is in worse shape than the unemployment rate suggests. The minutes mention the “easing in average hours worked” as well as the “decline in the participation rate”, based on the monthly jobs data to February 2012. However, the March jobs data (released after the April Board Meeting) painted a different picture of the labour market, with jobs up 44K in the month, hours worked rising 0.9% over the year and the participation rate rising to 65.4% in April.

Advertisement

From Bill Evans at Westpac, who highlighted the frustration the Board was having with the slow melt in house prices, along with the impact of tightening fiscal policy and bank funding costs. Westpac are calling for a 0.25% cut in May, possibly even higher: (emphasis added)

……stronger emphasis is given to the divergences between sectors and regions in the economy. Whereas the Governor referred to “differences” these minutes refer to “sharp differences”. There is recognition that “the level of non-mining investment had been flat over 2011 and recent surveys of business intentions suggested that non-mining investment was likely to remain sluggish for some time.”

The members also “spent some time exploring reasons for the weakness in many of the indicators for housing turnover and building activity”. One explanation was the sensitivity of developers to the outlook for prices, while auction clearance rates were described as being below average levels. The minutes do not go so far as to question why there appears to have been only muted response to the recent rate cuts but one can sense some degree of frustration in the likely discussion.

Probably the most surprising aspect of these minutes was the direct comment on fiscal policy. The Bank specifically points out that economic conditions will be impacted by “significant fiscal tightening in the next few years”. Despite the government indicating the intention to return the Budget to surplus from a deficit of around $40bn we cannot recall the Bank specifically referring to fiscal tightening in previous statements.

The importance of term deposits to the banks’ overall funding profile has been emphasized. Recall that the Bank has noted that “Since the middle of 2011 there has been a further increase in banks’ funding costs relative to the cash rate of the order of 20-25bps”. That mismatch was explained in terms of the general principle that the RBA cash rate had become a less important influence on the banks’ funding costs due to competition for deposits and the increased costs of term funding.

Westpac expects that the underlying Q1 inflation print, due on April 24, will be 0.6%qtr and 2.3%yr, down from 2.5% in Q4. That number will provide the Bank with ample scope to cut rates at its May 1 meeting. Based on the sentiment from today’s minutes there would be some flexibility to look through an even higher number. Consequently we are confident that the Bank will deliver a 0.25% rate cut on May 1. Our current forecast is that this cut will be shortly followed by a second move in June/July…

Some self confessed cherry picked portions lifted straight from the Minutes from The Kouk – Stephen Koukalas, who is calling for a 0.5% cut, with his emphasis added:

Advertisement
Below are some cherry-picked comments from the RBA Board Minutes for April released this morning.
Make up your own mind whether the RBA should have cut rates from current levels or not.
The growth rate of the world economy was expected to be at a below-trend pace in 2012, with ongoing weakness in Europe and an easing in the pace of growth in China.

The financial problems in Europe continued to be a potential source of adverse shocks to the world economy, despite downside risks to near-term global growth having receded somewhat over the past month.

Growth in the Chinese economy had clearly slowed over the past six months in response to a policy-induced softening in domestic demand and weaker external demand.

To the extent that higher oil prices reflected concerns about supply, they were adding to the downside risks to the global recovery and upside risks to headline inflation.

Members noted that the national accounts for the December quarter had shown an increase in real GDP of 0.4 per cent in the quarter and 2.3 per cent over the year, which were both lower than expected.

Growth in exports over 2011 had been weaker than expected, mainly because of lower coal exports… Service exports had also been weak, reflecting a decline in the number of visas for foreign students as well as the effects of the higher exchange rate and lower external demand.

The level of non-mining investment had been flat over 2011, and recent surveys of business intentions suggested that non-mining investment was likely to remain sluggish for some time. Business credit growth had increased slightly over recent months, but remained low.

Members noted that an easing in average hours worked and a decline in the participation rate were indicative of a softer labour market than that implied by the unemployment rate.

For the domestic economy, members observed that the balance of recent data suggested that output growth was somewhat below trend over 2011.

They noted … soft overall conditions in the housing sector and the likelihood of significant fiscal tightening in the next few years.

Despite the rate of unemployment showing little change for some time, it was apparent that labour market conditions had softened over the course of 2011.

Over the past month, domestic financial conditions had been mostly unchanged, with interest rates for borrowers remaining close to their medium-term averages, credit growth modest and the exchange rate remaining high in the context of an easing in the terms of trade.

The Board had eased monetary policy late in 2011. Since then members had lowered their assessment of the pace of growth somewhat.