RBA Minutes see more cuts ahead

It’s looking pretty unlikely that I’ll have to run up a local mountain naked. The RBA Minutes today were uber-dovish. I’ve highlighted the three key passages at the end. There are three key considerations: where is mining bust at; where is the housing recovery at and where is inflation at? Two of three have gone dovish since the last meeting with the mining bust more obvious and inflation less so in wages data. Housing data has been better but is still weak.

A cut in December is live and kicking.

Minutes of the Monetary Policy Meeting of the Reserve Bank Board

Sydney – 6 November 2012

Members Present

Glenn Stevens (Chairman and Governor), Philip Lowe (Deputy Governor), Martin Parkinson PSM (Secretary to the Treasury), John Akehurst, Jillian Broadbent AO, Roger Corbett AO, John Edwards, Heather Ridout, Catherine Tanna

Others Present

Guy Debelle (Assistant Governor, Financial Markets), Christopher Kent (Assistant Governor, Economic),Jonathan Kearns (Head, Economic Analysis Department), Anthony Dickman (Secretary), Peter Stebbing (Deputy Secretary)

International Economic Conditions

International economic news over the past month was, on balance, more positive than in recent months, though earlier weak data had led forecasters to expect further delay in a pick-up in global activity. The pace of growth in China appeared to have stabilised in response to the earlier fiscal and monetary stimulus, with a pick-up in infrastructure construction. Timely measures of production and spending were mixed, but had generally been stronger in recent months.

Members observed that the US economy continued to expand at a moderate pace. Growth in GDP and consumption picked up a little in the September quarter, although business investment had weakened. Employment growth had improved in the past four months relative to earlier in the year, and housing prices and commencements continued to rise, albeit from low levels. While significant uncertainty remained over the extent and effect of fiscal consolidation from early 2013, members noted that a positive resolution of this matter could result in better growth prospects.

Economic activity in Europe remained weak. The PMIs and household and business sentiment remained at low levels across the region, including in France and Germany, which until recently had been more resilient.

The Japanese economy had weakened in the September quarter, with falls in consumption and exports. Growth in the rest of east Asia was also relatively subdued in the quarter, partly reflecting weakness in consumption, especially for the higher-income economies. Exports and industrial production were soft, though more recent data generally showed a slight improvement. In response to weaker growth, monetary and fiscal policies had been eased a little over recent months in some countries in the region.

Commodity prices had been mixed over the month. Members noted that the spot price for iron ore had recently increased in line with a rise in steel production and prices, but remained well below levels seen earlier in the year. In contrast, spot prices for both thermal and coking coal had declined further. Global food prices were higher and base metals prices remained broadly unchanged from the middle of the year. The terms of trade were estimated to have declined further in the September quarter, and were forecast to be 15 per cent below their 2011 peak by the end of 2012.

Domestic Economic Conditions

Members noted that inflation in the September quarter was a little higher than had been expected. Various measures suggested that underlying inflation was around ¾ per cent in the quarter and around 2½ per cent over the year. The headline CPI rose by 1.2 per cent in the September quarter on a seasonally adjusted basis, and was 2 per cent higher over the year. These outcomes reflected, in part, the introduction of the carbon price, which had had a noticeable effect on electricity and gas prices. New dwelling prices had picked up unexpectedly, as had grocery prices. Inflation in health prices had increased as a result of a tightening in the eligibility for the private health insurance rebate. Partly offsetting these effects was a softening in the inflation of rents in the quarter and subdued rises in the prices of a range of market services.

Tradables inflation picked up in the September quarter, partly owing to strong increases in fruit and vegetable prices. Members noted that there had been small increases in many other tradables prices over the past two quarters after earlier declines. This suggested that the downward pressure on tradables prices from the earlier appreciation of the exchange rate was waning.

After a long period of stability, the unemployment rate increased in September, which was consistent with other indicators that had suggested the labour market had softened in recent months. There had been a substantial fall in construction employment over the past year, reflecting a somewhat delayed response to persistently weak conditions in parts of that sector. Leading indicators of labour demand had softened a bit further, suggesting modest near-term employment growth was likely.

Overall, growth of the Australian economy had slowed from an above-trend pace earlier in the year, with recent indicators of activity suggesting that economic growth was more moderate in the September quarter.

Household consumption appeared to have slowed from the strong pace seen earlier in the year to a pace around, or a little below, trend in the September quarter, in line with income growth. Retail sales values increased through the quarter, although sales volumes fell slightly following the fading of the impetus from earlier government household assistance payments. Nevertheless, members observed that sales of motor vehicles to households had been strong in recent months. Liaison suggested that the value of retail spending rose in October, though some of this may have reflected higher prices rather than higher volumes.

There were tentative indications that housing activity may be reaching a turning point. Over recent months, the number of private residential building approvals had increased, as had dwelling prices, and auction clearance rates in Sydney and Melbourne had continued to rise.

Members observed that business surveys suggested that conditions were a little below their long-run average level. Conditions in the mining sector had declined since earlier in the year, but had improved in retail and manufacturing to around long-run average levels. Weaker sentiment in mining apparently reflected the decline in bulk commodity prices over recent months and was consistent with the outlook for more modest growth in mining investment. Outside the mining sector, indicators of private non-residential investment remained relatively subdued, although business credit grew in September, after two months of essentially no growth, and non-intermediated funding had increased. Exports were estimated to have been weak in the September quarter, owing to softer global demand for coal.

The Government had recently released its mid-year economic update. Newly announced policy changes did not materially alter the assessment (from a range of sources) that the move from a Federal budget deficit to a small surplus could subtract somewhere between ¾ and 1½ percentage points from growth in 2012/13.

Members were briefed on the updated staff forecasts. The forecast for GDP growth was a little lower than that presented three months earlier, largely reflecting the change to the profile for mining investment. Over the year to June 2013, growth was expected to be a little below 2¾ per cent, before gradually picking up to around 3 per cent over 2014. The slightly softer outlook for economic activity overall was expected to be reflected in the labour market over the near term. Employment growth was consequently forecast to remain relatively modest over the course of the next year, before rising gradually towards the end of the forecast period.

Members observed that the inflation forecast was largely unchanged from three months earlier, with underlying inflation expected to remain consistent with the inflation target over the next two years. Although the rate of inflation over the year to the September quarter was a little higher than had earlier been forecast, raising the starting point for the projections, the effect of this on the inflation forecast was offset by the slightly weaker outlook for domestic economic activity and employment. Based on earlier Treasury modelling, the carbon price was expected to boost underlying inflation by around ¼ percentage point over 2012/13, and headline inflation by around 0.7 percentage points. The combination of the carbon price effect and volatility in fruit and vegetable prices was expected to see headline inflation rise above 3 per cent in year-ended terms in the first half of 2013, before declining to around 2½ per cent thereafter.

Financial Markets

While there was relatively little news affecting financial markets over the past month, market conditions generally continued to improve, supported by the better-than-expected flow of economic data, along with the ongoing effects of the actions taken earlier by the European Central Bank (ECB) and Federal Reserve. Members were briefed on the recent experience internationally with unconventional monetary policies and the potential lessons they held, including for Australia.

Members noted that the lack of unsettling news out of Europe in the past month had also supported financial markets, despite the absence of substantive progress by European policymakers in dealing with the underlying issues. Spain had not yet decided whether to apply for a precautionary financial assistance program, a pre-condition for the ECB to purchase sovereign bonds under its recently announced Outright Monetary Transactions program. Italian and Spanish government bond yields fell further over the month to be around their lowest levels since early 2012. On Greece, the outcome of the review by the troika of officials from the IMF, ECB and EU was expected soon.

Yields in major government bond markets, currencies and equities were all little changed over the past month. After falling over much of the past six months, share prices in China had risen in October, supported by better-than-expected economic data. The Australian share market was also higher, in part reflecting the stronger Chinese economic data. The Australian dollar was little changed over the month, both against the US dollar and on a trade-weighted basis, and remained at a high level.

Members were briefed on credit conditions, which continued to improve for both US and European corporates in October. Spreads on bank bonds had narrowed significantly since mid year. Issuance remained solid, particularly for non-financial firms in the United States that had taken advantage of extremely low yields to refinance their existing debt. Australian corporates maintained good access to debt markets, with secondary market bond spreads tightening further over the month.

Following the October cash rate announcement, most lenders in Australia had reduced their standard variable housing loan rates by around 20 basis points. The average interest rate on outstanding housing loans was now about 75 basis points below the post-1996 average, while rates on small and large business loans were 75 and125 basis points below average. Competition for deposits remained strong, with deposit funding accounting for more than half of total bank funding.

The Board’s decision to lower the cash rate by 25 basis points at the October meeting had been largely anticipated by the market and did not have a large effect on the yield curve. Members noted that current market pricing implied around an even chance of a 25 basis point easing in monetary policy at this meeting.

Considerations for Monetary Policy

For the global economy, data received over the previous month had been somewhat more positive. In particular, the US economy continued to expand at a moderate pace and there were signs that the pace of growth in China may have stabilised. Recent policy announcements in Europe had helped to bolster financial market conditions, though economic activity there remained weak. A significant deterioration in financial and economic conditions in the euro area remained a downside risk for global growth, although risks elsewhere were more balanced.

For Australia, a range of indicators suggested that the economy had been growing around trend pace over recent months, having slowed from above-trend growth earlier in the year. The staff forecast for GDP growth over 2013 was revised down, largely because of a change to the mining investment profile. However, there was considerable uncertainty about the timing of spending for mining investment projects, given their size and complexity. While a gradual recovery in both dwelling and other business investment was anticipated, assisted in part by the lower level of interest rates, there was also uncertainty about the timing and magnitude of this pick up. Hence, there was uncertainty about the overall pace of growth of demand in the economy over the forecast period.

Members noted that the staff’s forecast was for underlying inflation to remain close to 2½ per cent over the next two years, apart from the temporary effect of the carbon price. With the disinflationary effect of the earlier exchange rate appreciation on tradable prices waning, this forecast was predicated on the assumption of ongoing productivity growth and some moderation in the growth of wages to contain domestic cost pressures.

The Board’s decision at the October meeting to reduce the cash rate had pushed borrowing interest rates a little lower relative to their average levels. The effects of the earlier reductions in the cash rate were, meanwhile, continuing to work their way through the economy, and members expected that further effects of these changes were yet to be observed. Members considered that further easing may be appropriate in the period ahead. However, at this meeting, with prices data for the September quarter slightly higher than expected and recent information on the world economy slightly more positive, the Board judged that the stance of monetary policy was appropriate for the time being.


  1. Allow me to do some highlighting of my own:

    “The combination of the carbon price effect and volatility in fruit and vegetable prices was expected to see headline inflation rise above 3 per cent in year-ended terms in the first half of 2013, before declining to around 2½ per cent thereafter.”

    If we keep getting 0.1% price increases each month I don’t know how this is possible. So I’m assuming that we’ll get a few more 0.4%-0.6% monthly increases in the meantime, if the forecast is anything to go by.

    Also, they seem to think the AUD won’t appreciate much over the next year. If the rest of the world broadens their money base and the RBA doesn’t, then I’m not sure what the force keeping the exchange rate low will be without a dislocation in domestic demand.

  2. .. as had dwelling prices, and auction clearance rates in Sydney and Melbourne had continued to rise.

    The fact that they consider auction clearance rates to be a credible indicator of anything just shows how delusional our central bankers are getting.

    God save Australia (and our Queen 😉 )

  3. Of course they’ll cut. What other means to they have to protect a certain asset class and keep up the “Life is Beautiful” charade of prosperity that has been completely eroded by meaningless inflation figures for years?

    I’m backing demand destruction due to cost of living increases to put an end to the whole show.

  4. No surprises there – the RBA are a one trick pony when it comes to responding to the end of a debt driven asset bubble – crank down interest rates.

    The advice given to air-bed users when their bed starts to leak in the middle of the night sums up the monetary policy strategy of the RBA.


    Unfortunately, I don’t think monetary policy ‘dawn’ will be the relief that a leaky air-bed user can look forward to.

  5. AlbyManglesMEMBER

    interest rates need to come down by about 1%, for when trading figures come out for this october and november you will see a blood bath. trading is worse, alot worse, now then in 2008.

    • Why only 1%. Why not 1.5%, 2% etc

      People are still spending just not at the rate they were spending when they were spending their way into debt.

      People now want to borrow less money and that is causing lots of retail pain because if they borrow less they are spending less.

      Interest rate action by the RBA is like pushing on a piece of string.

      • No job in the private sector is “very very secure” but I appreciate the hope.

        Nor do I take any joy from the current state of affairs – angry is a fair description. So if you are feeling the squeeze I really do wish you the best.

        But I believe in using the right tools for the job and cutting interest rates is not the right tool for the enormous job of getting us through the end of an ideologically driven debt boom.

        Unfortunately, we lack the political leadership (on both sides) that is really required to minimize the pain (eliminate is simply not possible) and take the appropriate action.

      • What is the right “tool”? Is it still a monetary tool? Or is it really a fiscal (or legislative) tool like maximum LVRs? I really wouldn’t like those kinds of decisions just made outside of the political process. Though I’m not sure why there isn’t more momentum on legislating macroprudential rules in the current state of politics.

      • AlbyManglesMEMBER

        basically the economy has ground to a halt in the busiest month of the year for importers, suppliers, manufacturers, etc. i don’t know about retail, but the companies that are supplying goods to retail, to restaurants, to cafes have no orders. its baffling everyone. its never DEAD in november, even in a recession. i have spoken to alot of businesses in western sydney and brisbane and they are all the same. its like when everything fell off a cliff in may this year, but in november. unheard of.

      • AlbyManglesMEMBER

        oh yeah, i forgot to add that there are alot of businesses operating on a 4 day week in november! i have never seen that.

  6. General Disarray

    If you take into account inflation and tax on any interest from your savings – you’re probably actually paying the bank to lend it.

    Something just feels really wrong with that.

    • GD We’ve had negative RAT rates for decades. It’s a/the major reason that the whole system is now screwed.
      Of course the obvious solution is RAT rates that are even more negative!

      • General Disarray

        It’s crazy. If we’re not careful we could be at the point soon where you can’t run sound monetary policy without causing a big recession.

        We’re probably already well past that point.

      • Well past that point General Disarray. The only way out is a lot of pain I suspect (a la great depression and all that bought).

        As a species we aren’t the greatest at learning from our mistakes. And as before discussed on this blog, democracy isn’t the greatest harbinger of sound policies, sadly.

    • Western economies are chronically ill, and its all self induced.

      I’m sticking to cash at present due to strong lack of faith/overvalued stock markets, and its a depressing feeling.

      5.16% for a U-Bank account or 5% for a good TD might seem quite decent, but after tax its really nothing. I’m just glad I have a decent job and am not relying on this pitiful investment as are many of our unfortunate retirees.

  7. Interesting that they are targeting and relying on a pickup in housing construction to offset the decline in mining investment. It seems a very targeted use of a blunt instrument.

    I go back to your point a few days ago, HnH, about shrinking parts of an economy (trade exposed sectors) to allow one to breathe (mining) and then once the non-mining economy has shrunk enough relative to mining then trying to expand it again as mining shrinks. Yes, this is the whole idea of monetary policy, but when the mining sector is being driven by malinvestment in China, it is in some sense malinvestment in Australia as well. So why do we allow malinvestment to occur when the non-mining economy is going to need to expand again once mining subsides. We are back to where we started but had some disruption in the non-mining economy for a short period, which seems really inefficient – moving resources away from the non-mining sector, only to try to stimulate it again. This is inefficiency, surely (capital is not fungible, there are Austrian arguments applicable here).

    The Australia Insitute wrote an interesting paper about limiting the number of mining projects that can occur. While it seems like a good idea (in that it would limit the malinvestment in Australia and thus the allocative inefficiency of moving resources out of then back into the non-mining sector in a very short period). Ultimately, however, there is a knowledge problem – mining companies are better off choosing the amount of investment that should occur, not the government in granting a certain number of licences. So where does that leave us? I guess its the imperfection of the capitalist system.


    • That was what RSPT was meant to do, without the government having to actually limit the number of licenses. Pity the transnational mining companies assassinated a PM and gutted the mining tax.

      • Its interesting that we need an RSPT to do that – the argument would be that mining companies know best, but its incredible how they are all of a sudden calling off projects and announcing cost overruns. Its definitely industry knowledge that booms create more resource scarcity and that ToT booms tend to fall quickly and sharply. Seems its the product of a “Darwin Economy”, as Robert Frank put it, or as I like to put it, the competitive urge to take that next step so as to not fall behind, which inevitably leads to a prisoner’s dilemma for the industry and society, mixed with an overconfidence bias, and perhaps limited liability companies and principal/agent problems.

      • The urge to take short-term profits over long term stability is now present in every industry now and not necessarily unique to mining.

        There is a logical explanation for it amongst publicly listed companies (CEO greed does not necessarily align with shareholders interest). But no explanation for why privately owned ones like Hancock Prospecting do it. Perhaps they just have a dumb management.

      • Valid points. A related paper in a recent volume of havard business review raises some good points. Family run (but large) companies take on less debt, are more robust in downturns, and have better returns over the long run when compared to non family run large companies. They make less money in booms, but are more resilient in downturns. Maybe because its their money? Seems to address a few of the points we have raised

    • The Australia Institute proposal has already been demonstrated as flawed. Market forces have determined that some project may/will not proceed in the short-term.

      Both ‘fathers’ of the concept of Dutch Disease have recently revised positions in regard to this very issue, now largely in the camp of adjust in general, possibly a tweak here and there.

      Given natural economic transition that has taken place can anyone think the turmoil that may have erupted had Richard Denniss and the TAI be paid serious attention.

  8. Yeh, I dont think many people want the government picking the ‘right’ amount of investment that should occur. Denniss from memory raised the issues about mining booms but failed to address the informational, incentive, and public choice issues surrounding government licensing. Yeh sure no system is perfect, but that doesnt mean govt can do better