From Westpac’s chief economist, Bill Evans, comes the following analysis of today’s Board Minutes, released by the Reserve Bank of Australia, which revealed ongoing concern over the economy and the persistently high Australian dollar, but little concern over house price inflation:
The minutes of the September monetary policy meeting of the Reserve Bank Board indicated a more stimulatory bias to policy than we had seen in the Governor’s statement released immediately after the meeting. This repeats the events of the August minutes which used similar terms. Specifically, the minutes noted: “Members agreed that the Bank should again neither close off the possibility of reducing rates further nor signal an imminent intention to reduce them”. This is clearly more of an easing bias than the ‘neutral’ bias which the Governor’s statement appeared to indicate.
There are two reasons for the Board adopting this stance. Firstly, the general description of the domestic economy in the minutes is markedly downbeat. Note that the Board meeting occurred before the release of the June quarter national accounts. Despite the wording being downbeat, the Board was advised by the staff that both business investment and dwelling investment were likely to have risen in the June quarter. In the event the national accounts reported falls in both of those expenditure categories. The general tone around the description of the economy was subdued: “firms’ capital expenditure plans for non-mining investment remained subdued for the coming year”; “mining investment was likely to decline noticeably”; “growth of household consumption … had been below average … and liaison contacts reported that retail sales growth had been only modest in recent months”; “labour market conditions remain somewhat subdued … (and there was) a decline in the employment to population ratio”; “there were further signs that wage growth had eased over the year”.
Of course on the positive side has been housing. However even there the assessment was restrained: “housing turnover had increased from relatively low levels”; “recent data and information from liaison were consistent with further recovery in the established housing market and moderate growth in dwelling investment”. My assessment of this commentary does not indicate that at this stage there are any concerns in the Bank about an overheated housing market.
The second reason for the Board adopting this stance relates to the Australian dollar. It is described as “still high” and it is noted that “some further decline in the exchange rate would be helpful”. Maintaining an easing bias may assist in putting some downward pressure on the AUD. Of course over the last few months there has been a marked increase in the AUD which may be partly due to the market interpreting a firm neutral stance from the Bank. Recall that the AUD was around 90c US at the time of both the August and September Board meetings. That compares with 93c today. There is no doubt that the Bank believes that part of the reason behind the fall in the AUD between April and August was the RBA’s rate cuts and its consistent easing bias. Today’s minutes confirm that bias more clearly than we saw in the Governors’ statement.
Conclusion
Markets have moved to price out any more rate cuts. We believe that has been substantially motivated by developments offshore and is not consistent with the signals from the Reserve Bank. Today’s minutes support our view that there will be no change in October but by the time of the November meeting the Board will be able to assess: whether business and consumer confidence hold up following the exuberant reaction to the election result; more information around the AUD, which is clearly a source of concern for the Bank; more data around the labour market; and of course the September quarter inflation figures. We still favour prospects for a cut in November while recognising that waiting until December would not be a policy mistake. A December decision would provide even more information around those factors discussed above as well as providing critical information around business investment intentions following the election and more information around the easing in wage pressures.
