Banks are shortening their odds of forthcoming rate cuts after today’s RBA Minutes. First, Bill Evans of Westpac sees November and October:
Todays Minutes of the RBA’s September Board meeting shows some significant signals that the Reserve Bank is close to cutting rates. On balance, we still expect that they will begin this cycle in November, but the ground work has been laid for a move as soon as October. The following aspects of the statement stand out:
“The current assessment of the inflation outlook continued to provide scope to adjust policy in response to any significant deterioration in the outlook for growth”. While the word “significant” literally represents a high hurdle, the fact that the discussion refers to scope to cut rates when the previous month did not mention that possibility clearly indicates that the RBA is moving towards another cut.
2) The language around the Australian dollar and the terms of trade are both important. Firstly, “Members discussed the possibility that the high level of the exchange rate was weighing more heavily on the economy than might be expected”, and “If sustained, this decline [in iron ore and coking coal prices] would imply a larger fall in the terms of trade than the staff had earlier forecast”. That observation was backed up by the words “a sharp decline in spot prices for iron ore and coking coal”. Note that at the time of the Board meeting, the spot price for iron ore was around $88/t and has subsequently increased to $105/t.
3) “Developments since the previous board meeting suggested that the global economy remained subject to significant downside risks. Of particular note this month was the recent sharp decline in some bulk commodity prices.” Of course this statement preceded the aggressive quantitative easing stance taken by both the US Federal Reserve and the ECB, with both policies being announced two to three days after the Board meeting.
4) The language on China was less dovish than we saw in the Governor’s speech. At the time he talked about “uncertainty about near-term growth” whereas the minutes talk about “most recent data had been a touch weaker”.Activity in the rest of Asia was described as “had softened”.
The commentary on the domestic economy remains tentatively positive. For example, while the fall in retail spending in July was acknowledged, the bank pointed to liaison reports which suggested that spending had picked up in August. Conditions in housing were described as subdued with ” tentative signs of improvement”. Slight increases in dwelling prices over the last three months in Sydney and Melbourne were noted. On the other hand, investment outside mining was expected to “remain subdued”.
This meeting was held before the latest fall reported for the unemployment rate to 5.1%. The view on the labour market remains the same, noting “modest employment growth”, although the rise in the number of unemployment benefit recipients was noted. Wages growth was described as picking up a little in the June quarter.
The Minutes confirm the assessment that the domestic economy appears to be growing at around trend pace and there are signs that the rate reductions are still working their way through the economy.
Conclusion
We assess the decision to refer to “scope to adjust policy” as being quite important. The condition required for policy to adjust is described as “any significant deterioration in the outlook for growth”. That definition can be used quite flexibly to justify a rate cut. For example, the “high level of the exchange rate” might be assessed as significantly affecting the outlook for growth, or a bigger than expected fall in the terms of trade might also fall into that category. In short, because the condition refers to the outlook rather than the actual level of growth, there is a high degree of subjectivity involved. The commentary links this view to further falls in iron ore prices, For the moment these appear to have stabilised, but the outlook remains volatile.
We think the Bank is close to moving on rates but, in a close call, do not assess that there is sufficient evidence from these Minutes to revise our view that the cuts are likely in November and December.
I agree with Bill Evans as usual. ANZ brought its cuts forward to October and November, which is quite possible and HSBC is sticking with one in November which I don’t agree with. No point in just one.
Moreover, I reckon by this time next year (more or less), we’ll be approaching whatever is the Australian equivalent of ZIRP.
120918 RBA Observer Update – Expect a Cut Before Year-End
ANZ Australian Economic Update – RBA Minutes September 2012
