Minutes of RBA Board meeting, June
Westpac Economics anticipates one rate hike by the RBA in 2011, with the most likely timing November. The Minutes have not changed our view.
The RBA Board has left interest rates unchanged since last November, when the cash rate was raised by 0.25% to 4.75% – the first move since May 2010.
The key final two paragraphs of the June Minutes make for very interesting reading (see below for text).
The Minutes state that a further tightening of policy will be necessary at some point, if the economy evolved in line with the “staff forecasts”.
Members of the Board considered the medium-term outlook to be “broadly” as discussed in the May meeting.
(What’s not clear is whether the word “broadly” also implies shades of disagreement, maybe on timing and on risks.)
Members considered that developments “over the past month had not added any urgency to the need for an adjustment to policy” and hence the Board Members considered that the current monetary policy was appropriate.
The final two paragraphs of the June minutes are arguably more balanced than the text in May. Emphasis is now given to the recent soft flow of data / events and there is the addition of the words “no added urgency”. Moreover, there is greater emphasis given to subdued conditions in some other important parts of the economy (ie outside of mining). In the discussion of the Domestic Economic Conditions the Minutes note “investment intentions outside the mining sector were considerably weaker”.
These sentiments, and likely developments over the coming month, point to rates remaining on hold at the July RBA Board meeting.
Our reading of domestic conditions, reinforced by increased uncertainty globally (particularly Europe), suggests that there is not a pressing need to move interest rates just now.
Recall that the hawkish comments from the RBA were … “if economic conditions continue to evolve as expected”. Also, the RBA has highlighted, in their discussion of risks, that “the behaviour of households and the labour market would be important determinants of the outcome for inflation over the next few years”.
Recent updates point to a less confident consumer (the June Westpac-MI Consumer Sentiment survey). Employment has corrected over the last 6 months, with just 30k jobs created, following an unsustainable 228k jump over the previous 6 months. Moreover, forward indicators for employment have moderated.
Q2 CPI, a potential trigger
If there were to be a near-term trigger to move rates, the Q2 CPI update on 27 July is a potential game changer.
This was suggested by RBA Governor Stevens in his speech on 15 June.
“This central expectation – subject to all the usual uncertainties inherent in forecasting – suggests, as we said at the time, that ‘further tightening of monetary policy is likely to be required at some point for inflation to remain consistent with the 2–3 per cent medium-term target’. It remains, though, a matter for judgement by the Board as to whether that point has been reached. At its most recent meeting, the Board’s view was that it had not been. New information will, as always, be important in our monthly assessments of what monetary policy needs to do. As far as prices are concerned, we will get another comprehensive round of data in late July.”
The Q1 CPI update revealed a concerning jump in quarterly core inflation from 0.4% for Q4 to 0.9% for Q1. Westpac is forecasting core inflation to be 0.7% for Q2, which is unlikely to be sufficient to prompt an RBA response.
Text: Consideration for Monetary Policy, June minutes
“Members considered that the medium-term outlook for the economy was broadly as discussed at the May meeting. While inflation was currently in the bottom half of the target range in underlying terms, this had been partly due to the disinflationary effects of the appreciation of the exchange rate and the earlier moderation in labour costs. If the economy evolved in line with the staff forecasts, GDP growth would be somewhat above trend over the next few years, led by growth in the resources sector. A gradual pick-up in inflation could be expected under this scenario.
This outlook suggested that further tightening in monetary policy would be necessary at some point. Members considered, however, that the flow of data over the past month had not added any urgency to the need for an adjustment to policy. While there had been additional evidence of the coming strong pick-up in investment in the resources sector, activity remained quite subdued in some other important parts of the economy, partly reflecting the Board’s earlier actions as well as the appreciation of the exchange rate. Credit growth remained quite moderate and asset prices had softened. In addition, the global activity data had been somewhat softer and downside risks to the international economy had become a little more prominent over the past month, especially in the case of sovereign debt problems in Europe. Accordingly, members judged that it would be prudent to leave the stance of policy unchanged, pending further data on international developments and on the strength of domestic demand and inflationary pressures. They therefore considered that the current monetary policy setting was appropriate.”
Westpac Banking Corporation