Fresh from our Bill:
The minutes of the monetary policy meeting of the Reserve Bank Board for May 6 depict a central bank which appears to be somewhat more dovish in May than we saw in April.
This point is probably best exemplified by the language used to describe the “on hold” policy. In April the policy was described as: “the most prudent course was likely to be a period of stability in interest rates”. In May the stance is described as: “the current accommodative stance of policy was likely to be appropriate for some time yet”. This language is similar to the observation made in the Statement on Monetary Policy (SoMP) on May 9.
The Bank continues to appear to be quite downbeat about the labour market despite “some signs of improvement for a number of months”. However they point out that “the demand for labour remains subdued and was likely to remain so for some time”. It also points out that employment growth was not likely to exceed population growth consistently for some time implying that the Bank expects further increases in the unemployment rate. Indeed supporting this view the SoMP speculated that a sustained fall in the unemployment rate was unlikely before growth moved above trend which was not considered to occur before the middle of 2015.
The weakness of the labour market is also seen to be helping with the inflation target with spare capacity “weighing on labour costs and profit margins for some time”. This is seen to be an important offset to the upward pressures associated with the 10% fall in the AUD since April 2013. Clearly the March quarter inflation report which highlighted a slowdown in non traded inflation has given the Bank considerable encouragement around the inflation outlook. It has been an ongoing theme in the Bank’s deliberations as to when some easing in non tradeable inflation associated with soft wages data was likely to come through.
The rhetoric around the housing market has also softened. In April the market conditions were described as “remain[ing] strong”. In May it was noted that “housing price inflation had eased somewhat”. However the lift in the likely outlook for both residential and non residential construction was noted.
There is a surprising absence of commentary around the Australian dollar. Recall that in the months up to February it was described as “uncomfortably high” and in the February-April minutes it was described as “high by historical standards”. In these minutes there is no comment around the level of the exchange rate. Of course that seems a little curious given that it has appreciated by 6% in trade weighted terms since late January. One can only conclude that the Bank is less certain around the significance of the exchange rate in determining the stance of financial conditions. In effect since the exchange rate has appreciated the domestic data around dwelling investment, consumption and business conditions have improved.
It is reasonable for us to speculate that the Board’s practise of quoting the implied cash rate from money market rates reveals their own likely position. Once again it is pointed out that money market rates imply “no change in the cash rate was expected … over the rest of the year”.
Conclusion
On March 17 Westpac revised its forecast for monetary policy from “further cuts in the second half of 2014” to “no further moves until a tightening in the second half of 2015”. Recent surveys of economists’ forecasts indicate that around two thirds of commentators are expecting a rate hike by late 2014 or early 2015. There were also some forecasters expecting rates to come down further.
Of course the profile for rates will be determined by developments in the economy. However, it gives us some comfort around our own forecasts that the Bank seems to be of a similar view to ourselves that the timing of the next rate change (likely to be a hike) is more than a year away.
