Fro our Bill:
The minutes of the monetary policy meeting of the Reserve Bank Board for November provided no significant surprises.
The key policy conclusion was the same wording as we saw in the Statement on Monetary Policy: “The Board judged that the inflation outlook may afford some scope for further easing of monetary policy should that be appropriate to lend support to demand”.
Probably the most significant change in these minutes relative to the October minutes was around the growth outlook for the Asian region: “Growth in Asia had slowed by more than had earlier been expected”. This covered both China and other countries in the Asian region. However the Board has not changed its view on the terms of trade – “outlook for Australia’s terms of trade was little changed”. Nevertheless, uncertainty was emphasised given that upside risks were centred around possible prospects for( unpredictable) high cost Chinese producers cutting production. On the downside there is a clear downgrade in the likely lift in demand associated with a pick-up in construction activity.
On the domestic economy the themes are largely unchanged. The expected lift in growth in 2016 and 2017 is forecast to be reliant upon a lift in household expenditure growth supported by low interest rates; relatively strong employment growth; a gradual decline in the household savings ratio; and a slow pick up in income growth. However this scenario is qualified as “an important source of uncertainty”.
The minutes do provide us with a clearer view on the bank’s outlook for mining investment arguing that the decline in mining investment will have largely run its course by the end of 2017 and the largest subtraction from demand (1½ percentage points) will occur in the current fiscal year (2015/16). Prospects for non-mining investment remain uncertain with surveys of business conditions in the non-mining sectors remaining above their long run average but this growth being concentrated in the services sector which is less capital intensive.
Commentary on the labour market remains positive. Lead indicators such as job vacancies and advertisements continue to point to a lift in employment while there has been a “noticeable increase in the participation rate”. However these offsetting factors mean that the unemployment rate will not fall “for more than a year” before declining gradually.
The minutes provide some interpretation of the unexpectedly low September quarter measure of the CPI. While the lower than expected increase generally reflected broad based forces it is also pointed out that “falls in regulated utility prices in some states had also contributed”. The commentary repeats the forecasts which show underlying inflation holding at 2% in the year to June next year but picking up to 2½% over the whole of 2016.
The minutes also go out of their way to downplay the impact of the 15-20bp increase in mortgage rates which had been initiated by the large banks. It is pointed out that this was partly offset by lower margins on lending to large businesses while the overall impact on demand is described as reducing the “support to demand … slightly”.
The outlook
Westpac continues to hold the view that rates will remain on hold over the course of 2016 with virtually no chance of a rate cut next month.
However as we have argued elsewhere the dynamics of a need to provide further stimulus are likely to evolve in the event of a further unexpected collapse in the terms of trade. To date this is not our forecast and it is clearly apparent that it is not the forecast of the Reserve Bank. That fall in the terms of trade would most likely significantly weaken income growth which may not be sufficiently offset by a lower savings rate. Ongoing improving employment conditions would avert the need for lower rates but here the risk would be a feedback on confidence from this terms of trade effect onto employment decisions.
This dynamic is unlikely to be clear to the Bank by February and therefore the hurdle for any policy change in February is quite high. However, based on these minutes it is reasonable to assume that the Bank also sees this dynamic as the most likely source of a need to sharply revise down the current confident 3% growth forecast for 2016.
We will continue to monitor these issues whilst emphasising that if our central view of steady rates is going to be wrong over the course of the first half of 2016 it will be that rates must be lower rather than higher.
You need to change that outlook, Bill. Further terms of trade falls are precisely what is coming down the pipe next year. Increasingly it appears that house prices will fall right along with them. The RBA is going to cut, then cut, then cut again.
