Fresh from our Bill:
The minutes of the April monetary policy meeting provide further insights into the current thinking of the Reserve Bank.
The decision not to cut rates at the April meeting despite “financial markets assign[ing] a high probability to a reduction in the cash rate at the current meeting” seem to be explained by a need for more time and more data to “assess whether or not the economy was on the previously forecast path”. It seems that even the “previously forecast path” would be sufficient to justify another rate cut. In that regard it appears to us that the Bank is actually preparing to lower the growth forecasts which printed at the February Statement on Monetary Policy (SoMP).
This decision would be specifically around business investment and exports. In these minutes the Board significantly lowers its expectations for both mining and non-mining investment. On non-mining investment it refers to “forward looking indicators as well as liaison” suggesting that it was likely to remain subdued, AND COULD EVEN DECLINE over the next year or so” (our emphasis). On mining investment it noted that “the recent declines in bulk commodity prices could, at the margin, lead to a larger than expected fall in mining investment and some decline in the production of iron ore and coal” implying a more subdued outlook for exports.
While the minutes do note that consumption and dwelling investment had picked up there was no strong implication of an upgrading in the outlook for the household sector with retail trade in the early months of 2015 being described as “about average”.
There appear to be more specific signs that the Board is increasingly more comfortable with the risks around the housing market: “there had been little change to housing market conditions overall or in the growth of housing credit in early 2015”. In a speech earlier today the Governor pointed out that “popular commentary is, in my opinion too focussed on Sydney prices and pays too little attention to the more disparate trends among the other 80% of Australia”.
Fiscal policy at the state level is also seen to be unhelpful in supporting growth with only NSW and Victoria getting any boost from public demand.
Other explanations for the decision to hold rates steady were around “receiving more data including on inflation”. Clearly next week’s inflation report will be important in that regard with our forecast of 0.1%qtr for headline and 0.5%qtr for underlying representing no hurdle for cutting rates in the face of the expected growth downgrade.
One issue that markets will clearly be pondering is whether the surprisingly strong employment report for March, which printed after this Board meeting, will be sufficient for the Bank to revise its “previously forecast path” for the labour market. We would be surprised if one month was sufficient to achieve that objective while there is no evidence to suggest that the Board has significantly changed its view on the labour market: “labour market conditions were likely to remain subdued”, “the various forward looking indicators were stronger than a year earlier but remained at levels consistent with only modest employment growth in the months ahead”. It is unlikely that one monthly report given the recent volatility in these reports would change that fairly entrenched view.
The Board introduces a new concept in these minutes that is around questioning the effectiveness of monetary policy pointing out that “the responsiveness of borrowers and savers to changes in interest rates and asset prices was unusually uncertain”. This may imply that resistance to ever lower rates is apparent although it appears to say more about what might happen after the May meeting rather than over the next few weeks.
The ongoing plea for a lower AUD is emphasised in these minutes: “further depreciation of the Australian dollar was likely given the recent declines in key commodity prices”. At the time of the April meeting the AUD was trading around USD0.76 and today we see it in the 0.77-0.78 range. This should be a clear signal that jawboning the AUD is unsuccessful if interest rates are not adjusted accordingly. It is clear in these minutes and in the Governor’s speech today that a lower AUD is necessary to achieve the adjustment in the economy that will be required to provide some buffer to the huge fall in Australia’s terms of trade and the sharp decline in mining investment.
Conclusion
From our perspective the key signal from these minutes is an implication that the Bank is preparing to lower its growth forecast in the May Statement on Monetary Policy citing the weaker outlook for non-mining investment and the impact of the recent fall in commodity prices on both mining investment and mining exports. In addition the language around housing market risks appears to be more confident while prospects for the consumer appear to be consistent with earlier forecasts. Arguably the major risk to our rate view is whether the recent strong employment report has motivated the Bank to significantly reassess its recent forecasts for the labour market. This seems unlikely firstly because that would be giving too much weight to one report and secondly it would be inconsistent with the Bank’s approach to link prospects for the labour market with the growth outlook.
We continue to remain confident with our forecast that the Bank will cut rates by 25bps in May but then keep rates on hold for an extended period until it has more evidence around the outlook for 2016.
I am now on board with same, though I still say it’s down to whether or not Capt Glenn gets lucky that day.
