“Less euphoric” RBA minutes hit Australian dollar

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Via Bill Evans:

The minutes of the monetary policy meeting of the Reserve Bank Board for April contained few surprises.

Arguably of most interest was the inclusion of “in current circumstances, members agreed that is was more likely that the next move in the cash rate would be up rather than down”. Our analysis indicates that this is the first time in this cycle that the minutes have included that observation. The theme comes as no surprise given that we have seen the Governor make reference to that balance of risks on numerous occasions in his own speeches.

The commentary around the labour market appears to be a little more reserved than we have seen in previous minutes. The minutes note that “monthly increases in employment have moderated”; “the unemployment rate had been little changed over the previous six months”; and “measures of underemployment had remained at relatively high levels”. Finally “these indicators suggested that there was still some spare capacity in the labour market”. Nevertheless the forecast of a gradually falling unemployment rate remains.

Recent commentary from the Bank has left us a little confused as to its growth outlook. In the Governor’s statement following this Board meeting he noted that growth in 2018 would be higher than 2017 (2.4%). In today’s minutes, growth “was expected to exceed potential growth”. The Bank has been on record in the past assessing potential growth as 2.75%. We will see the resolution to this puzzle on May 4 with the May Statement on Monetary Policy. It is most likely that the Bank will lower its growth forecast for 2018 from 3 ¼ per cent to 3 per cent.

The minutes note that “housing prices had declined further in Sydney and Melbourne”, with Sydney house prices falling by around 5% since the peak in mid 2017. The minutes observe that falls of 10% in some cities had occurred several times in the preceding fifteen years. This commentary indicates that there will be no real surprise at the RBA if we see further falls in house prices, particularly in Sydney.

Today’s minutes include a summary of the Financial Stability Review. While concerned about the impact that a sharp rise in interest rates might have on global markets, the Review seems quite relaxed about risks in Australia, “measures of household financial stress did not indicate a high of level of financial stress at present”. The RBA is also comfortable that the share of interest only loans in new lending had fallen sharply, and that the high loan to valuation ratios had also declined since APRA introduced the regulatory measures to tighten lending standards.

Financial conditions have also tightened in the interest rate markets. The minutes record “developments in US money markets had flowed through to higher short term borrowing costs in the financial markets in Australia”. Australia’s reliance on US markets to fund domestic assets explains this development. However, the Bank provides no opinion on whether these tight conditions will be sustained and therefore offers no implications for the economy and monetary policy. We can only note that Australian companies which rely on BBSW pricing for their loans will have seen around a 25bps increase in funding costs, while banks’ funding costs for their mortgage books will also have increased.

Other commentary on global markets is highlighted by recognition of above trend growth in the other major advanced economies. However the Bank remains guarded about the risks in the Chinese financial system due to its high levels of debt and high risk forms of credit intermediation.

Conclusion

We do not think that the decision to signal in the minutes that the next move in rates is likely to be up is at all significant. The Governor has made that point on numerous occasions in his own speeches.

There appears to be a less euphoric assessment of the labour market, while hints that the growth forecast will be lowered are clear. Developments in financial markets associated with tightening global liquidity are noted but no implication is offered. Prospects for further falls in house prices, particularly in Sydney, are certainly considered.

While the RBA’s rate outlook is consistent with their forecasts, the risks to that outlook continue to accumulate. Emphasising that progress towards lower unemployment and higher inflation will “be only gradual” appears to be a clear signal that the Bank is undecided at this point and will require quite some time before it can be confident with its view.

But Futureboom.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.