From Bill Evans:
The minutes of the March meeting of the Reserve Bank Board contain no real surprises.
It was noted in the Govenor’s statement which was released straight after the March 4 meeting that the Australian dollar remained high by historical standards. That was a change from the February statement which excluded any assessment of the level of the currency. Given that in the months up to the December Board meeting the currency was consistently described as ‘uncomfortably high’, with that term being excluded from the February minutes we see this strategy as being a modest compromise given the surprise the Bank may have received after that February meeting when the currency lifted from below 87c to around 90c.
The second major theme in these minutes is the explicit signal that “the cash rate could remain at its current level for some time if the economy was to evolve broadly as expected”. This sentiment first appeared in the Governor’s statement following the February Board meeting and has been confirmed both by the Governor’s March statement and these minutes.
Descriptions around the domestic economy were generally a little more upbeat than in February: “There were further signs that low interest rates were providing support to activity”. The weakness in the labour market and wages growth were assessed as “lagging changes in economic activity” while the minutes reported “growth in household spending looked to have picked up slightly”, “a small improvement in prospects for non-mining business investment” and “forward looking indicators of labour demand had stabilised”.
The strong housing market was emphasised: “dwelling approvals pointed to a substantial increase in dwelling investment in subsequent quarters”. In summing up the minutes note that “indicators had been generally positive for consumption, housing investment, business conditions and exports”.
After a month to contemplate the shock from the Q4 inflation report the Bank seems to be more balanced around the outlook noting that, “if domestic costs remain contained some moderation in inflation for non-traded goods and services could be expected over time” – offsetting the impact of the fall in the AUD.
Twice a year the Board is briefed on the Bank’s half yearly assessment of the financial system. The briefing to the March board included the experience in other countries where macroprudential tools had been utilised to slow demand for established housing. This followed a briefing back in September on the specific macro prudential policies which had been adopted by New Zealand. The Board concluded that “present conditions in the household sector did not pose a near term risk to the financial system”.
Conclusion
Yesterday Westpac revised its outlook for the overnight cash rate by no longer forecasting rate cuts in the second half of 2014. This decision was partly made because of the considerable comfort that the Board clearly holds with the current policy stance. The Board is pointing to gradual improvement in the economy; growth in 2015 being a little above trend; and inflation being contained within the 2-3% band. These are the hallmarks of a central bank that anticipates remaining on hold for some extended period. The Bank is setting a very high hurdle for any further policy stimulus.
While we still see a number of the headwinds for employment; the consumer; business investment and confidence restraining the pace of recovery we do not expect the type of growth profile emerging over the course of the next 12 months that would shock the Bank out of its current comfort zone.
Just joshin’ Bill, we still luvs ya!
