By Gareth Aird, head of Australian economics at CBA:
Key Points:
- The RBA August Board Minutes are the last piece of communication from the RBA until the all-important September Board meeting, where the RBA will once again raise the cash rate (the size of the impending rate hike is up for debate).
- The Minutes imply that the decision to raise the cash rate by 50bp at the August Board meeting was straight forward; no discussion on raising the cash rate by any other amount was presented.
- The Minutes reiterated that the Board expects to take further steps in normalising monetary conditions over coming months, but it is “not on a pre-set path”.
- Australian economic data to be released over the next two days on wages and the labour force will be key inputs into the RBA’s decision at the September Board meeting.
The Minutes
RBA Board Minutes for the months that coincide with the release of a quarterly Statement on Monetary Policy generally don’t contain much new information. Today was largely no exception. That said, the August Board Minutes provide some insight into what was ‘on the table’ at the meeting earlier this month where the RBA raised the cash rate target by 50bp to 1.85%. In addition, a comparison with the July Board Minutes captures the evolution in the Board’s assessment on the economy and economic outlook and implications for monetary policy.
In the July Board Minutes it was noted that, “members considered the possibility of raising interest rates by 25bp or 50bp. Members agreed that arguments for raising interest rates by 50bp were stronger.”
In the August Board Minutes there was no such sentence. Rather the Minutes today simply stated that, “given high inflation, the resilient economy and the tight labour market, and taking into account the risks, members agreed it was appropriate to continue the process of normalising monetary conditions. The Board decided to increase the cash rate by a further 50bp.”
This suggests that the RBA Board arrived at the decision to raise the cash rate by 50bp with relative certitude. It also indicates that the RBA did not consider a larger than 50bp hike (recall that some analysts had forecast a 75bp increase in the cash rate at the August Board meeting). By the same token, it implies a smaller than 50bp rate hike was dismissed quite easily (i.e. the Minutes do note state that a 25bp rate rise was under consideration in August).
The RBA Minutes today capture the deterioration in the global economic outlook. In the July Board Minutes it was stated that the risks to the global outlook, “remained clouded by the war in Ukraine”. In the August Board Minutes it was noted that, “the risks to the global outlook were skewed to the downside” (our emphasis in bold).
The Minutes today imply that the Board is getting closer to the point at which the RBA will pause in their tightening cycle.
In the July Board Minutes it was stated that, “the level of interest rates was still very low for an economy with a tight labour market and facing a period of higher inflation. Members viewed it as important that inflation expectations remained well anchored and that the period of higher inflation be temporary.”
In contrast, in the August Board Minutes it was noted that, “the increase in interest rates over recent months has been required to bring inflation back to target by ensuring that inflation expectations remain anchored and establishing a more sustainable balance of demand and supply in the Australian economy.”
The removal of the reference to the level of interest rates being still very low is important. It does not preclude further tightening. But it implies the Board is open to slowing down the pace of tightening and indeed pausing in their cycle in the not too distant future.
That idea is bolstered by the statement that the Board is “not on a pre-set path”. And that, “it is seeking to normalise monetary conditions in a in a way that keeps the economy on an even keel”. Note that the language around not being on a pre-set path and keeping the economy on an even keel first appeared in August in the Governor’s Statement accompanying the Board decision.
The outlook
Over the next two days the ABS will publish key data which relates to the labour market. An update on wages growth over the June quarter (i.e. the Q2 22 Wage Price Index) and the unemployment rate in July will be critical inputs into the RBA’s policy deliberations at the September Board meeting (see here for our full preview of the data).
Our central scenario is for the RBA to raise the cash rate by 50bp at the September Board meeting. But this is certainly not a done deal. The RBA could shift to ‘business as usual’ 25bp monthly increments from here, particularly if the data over the next two days supports the case to slow the rate of policy tightening. A 40bp hike could also be on the table. It would carry the dual benefit of restoring the cash rate to a more conventional metric whilst also sending a signal to an anxious household sector that the pace of tightening will moderate.
Our base case is unchanged. We see the cash rate target peaking at 2.60% in late 2022 (a level which we consider to be contractionary). And we have two 25bp rate cuts pencilled in for H2 23. We think that provided the RBA pause in their tightening cycle when the cash rate is ~2.60% (close to the 2.5% level the RBA have nominated as their estimate of neutral) the data will indicate that there is no need to continue to take the policy rate higher. Indeed taking the cash rate higher would likely generate a hard landing in the economy.
As a reminder, the RBA has put through an incredible amount of tightening already in a very short space of time (175bp over four meetings; i.e. three months). And there is a lag between changes in the cash rate and the impact it has on monthly cash flow for borrowers on a floating rate mortgage. At CBA, for example, by December the impact of already announced rate rises on monthly cash flow for mortgage holders will be a four-fold increase compared to July.
All eyes now on the Wage Price Index tomorrow.
