Via Bill Evans at Westpac:
The minutes of the November monetary policy meeting of the Reserve Bank Board give us no significant reason to change our view that the next rate cut will occur in February.
While some forecasters have been promoting the idea of a move in December, these minutes provide the flavour of a Board that is in no hurry to make the next cut. The minutes conclude that “the Board would continue to monitor developments”. It also referred to “having already delivered a substantial monetary stimulus in recent months, there was a case to wait and assess the effects of this stimulus, especially given the long and variable lags”.
Nevertheless, the minutes do not want to leave the reader in any doubt that the Board continues to have a clear easing bias. The minutes concluded that the Board “was prepared to ease monetary policy further if needed” and also noted that “members reviewed the case for a further reduction at the present meeting”.
The second important issue around the policy outlook is the “effective lower bound” (ELB) of the cash rate. Westpac has argued since July that the ELB will prove to be 0.50% and will be reached in February 2020. One factor that has been important to our thinking has been the response of the Westpac-MI Consumer Sentiment index to the rate cuts that began in June 2019. The index has been on a clear downward trend since and the Board has recognised that by noting that “a further reduction in interest rates could have a different effect on confidence than in the past”. Put another way, the Board “recognised the negative effects of lower interest rates on savers and confidence”.
On the other hand, the Board was informed that it appears that Banks still have adequate scope to pass on future rate cuts. The minutes noted that “while close to a quarter of deposits were estimated to be earning interest at rates between 0-50bps, most deposits earned interest at rates over 1%”. The Banks’ response to the cumulative 75bp reduction in the cash rate was to lower interest on at-call retail deposits by an average of 60-70bps. As noted above, this reduction in deposit rates is affecting the confidence of savers, whereas the data also showed that borrowers had been repaying existing loans at a faster pace. This observation puts one of the most important channels of monetary policy, a boost to spending from the increased cash flows of borrowers, at some risk.
In our preview to these minutes, we were hopeful that the minutes might cast some light on the sentence in the November Statement on Monetary Policy (SMP), “the Board was mindful that rates were already very low, and that each further cut brings closer the point at which other policy options might come into play”. The issue here is whether these “other policy options” refer to unconventional monetary policy, fiscal policy, or both. It is most likely “both”. So more details on the unconventional side would have been helpful. The Governor is speaking on “Unconventional Monetary Policy: Some Lessons from Overseas” on November 26. No doubt, he will cast some light on his thinking in that speech. It is also the last day before the blackout for the December RBA Board meeting. If he wanted to signal to the market that the very disappointing labour force and wages reports from last week, which printed after the November Board meeting, had swayed his thinking towards a December move, that speech would be the time. However, we would be very surprised, given the earlier discussion about these minutes, to see such a move from the Governor.
The November Board meeting also discusses the Staff’s revised growth outlook. As we noted in the discussion of the SMP, there were very few changes in the RBA’s forecasts. The RBA continues to forecast trend growth (2.8%) in 2020, and above-trend growth (3.1%) in 2021. Westpac is forecasting 2.4% growth in 2020, with the major differences being around the outlook for business investment and dwelling construction. In fact, the minutes highlight that the RBA remains uncertain about the pace of recovery in the dwelling cycle with one of the key factors being the impact of rising prices in the established market on new construction.
Commentary around the international outlook continues to point to risks being tilted to the downside. However, a key reason justifying the decision not to move in November was around the “decline in pessimism” which had been signalled by global financial markets. A further reason to delay any more cuts is to await outcomes for the global economy, with the developments around the US-China trade conflict being front of mind.
The case for a December rate cut is heavily downplayed in these minutes, although, as discussed, the meeting occurred before the disappointing wages and employment prints from last week.
We certainly do not believe that those prints will be sufficient to move the RBA away from its current “monitoring” approach and so confirm our forecast that the next cut will occur in February 2020.
The discussion around the impact of low rates on confidence is clearly very significant and gives some support to our view that 0.5% will be the effective lower bound of the cash rate in this cycle.
Probably still right.