From our Bill:
The minutes of the monetary policy meeting of the Reserve Bank Board for February provided no surprises given that we have recently seen the Statement on Monetary Policy (SoMP) and the Governor’s testimony to the House of Reps Standing Committee on Economics.
The key theme in those communications is repeated – that the Board will be assessing whether “the recent improvement in labour market conditions was continuing and whether recent financial market turbulence presaged weaker global and domestic demand”.
The tone of the discussion on the domestic economy was positive. The minutes noted that domestic data had on balance been positive and that there were reasonable prospects for growth to increase gradually over the forecast period. Household consumption was seen to be growing around trend and there was evidence that the low interest rates were supporting growth in consumption and dwelling investment with the lower exchange rate boosting demand. Whereas over the last year or so the commentary on the drag from mining investment tended to point to an intensifying of that drag the commentary now points out that the peak drag from mining investment is now likely to be in 2015-16 and the drag will lessen over subsequent years. We are aware that the Bank has been frustrated by the lack of pick up in non mining business investment and the minutes conclude that there is now little prospect of that pick up in the near term. However, the minutes do point out that business surveys are at above average levels and business lending has picked up.
There is more information on the Banks’ liaison contacts around the economy. They note that the demand for high density housing outside Perth has been sufficient to absorb the increase in supply, although an increasing number of projects have been put on hold.
Other liaison shows that in the retail sector trading conditions had improved in the Christmas and post-Christmas periods. Low interest rates, lower petrol prices and increasing employment were expected to continue to support household consumption growth.
The minutes also provided further interpretation of the strong employment data pointing out that output growth in the services sector had been strong with this sector being more labour intensive than others. Of course the Governor indicated in his Parliamentary Q&A that while he recognised there may be some technical difficulties with the current employment data he expected that the signal around the unemployment rate itself was reliable. In the recent SoMP the Bank forecast that the unemployment rate would continue to fall from current levels. While this was the Governor’s interpretation of the strong data the minutes do balance this view somewhat by pointing out that strong employment growth in conjunction with below average GDP growth created some uncertainty.
The commentary around international conditions was broadly unchanged with the forecast for trading partner growth expected to remain a little below decade average.
The one exception to this steady commentary was around China. Here the detail seems to be more pessimistic. Longer term structural factors such as declining growth in productivity and the urban working age population were also seen to be important. Deflationary pressures were persisting and there are concerns that the interaction between slowing growth, low inflation, and high and increasing levels of debt intensified uncertainty around the outlook. The minutes even speculated on the impact of a sharp slowing in economic activity that would spill over into the region including Australia.
The minutes contained a detailed discussion of global financial markets including the challenges for the Chinese authorities in managing the exchange rate in the face of depreciation pressure from private capital outflows. However, there was no evidence or speculation that these developments would pose substantial risks for Australia including funding costs for Australian banks which “had increased a little from their low levels recently”. As was the case with the Governor in his Parliamentary presentation, the minutes pointed out that the cost of new long term wholesale funding remained below the cost of maturing debt.
Conclusion
The minutes of course repeat the “soft easing bias” stance with the words “the outlook for continued low inflation may provide scope for easier monetary policy, should that be appropriate to lend further support to demand”.
Our reading of the minutes however suggest that at the moment the Board does not believe that further support will be necessary and it will take some months to determine whether that approach should change. Although we must be mindful of the risks of the feedback to the domestic economy of the current global financial turbulence we continue to maintain the view that rates will remain on hold in 2016.
