The minutes of the August monetary policy meeting of the Reserve Bank Board, in which it reduced the overnight cash rate by 25bps to 1.5 percent, provided little in the way of additional insight around the Bank’s forward view.
With the Governor’s decision statement released on the day, the Bank’s full Statement on Monetary Policy (SoMP) released a few days later and a speech from the outgoing RBA Governor since the decision, the minutes are mostly of interest for any additional detail they may provide on the decision rationale and points picked up in the Board’s discussion.
The ‘Considerations for Monetary Policy’ section sets out the rationale and largely restates the Governor’s decision statement but with a couple of minor tweaks.
One of these is picking up a phrase we had noted from the SoMP that “[members] observed that while prospects for growth were positive, there was room for stronger growth, which could be assisted by lower interest rates.” In contrast to its slightly ambiguous usage in the August SoMP, the phrase in the minutes is simply used as part of the explanation of the August rate cut decision rather than anything that might be construed as explicit forward guidance.
The other slight change – nuance perhaps – was around the description of the inflation outlook. The minutes state: “Underlying inflation was expected to remain low for a time before picking up gradually as spare capacity in labour and many product markets diminished.” This is a slightly different colour to the Bank’s straight numerical forecasts which have underlying inflation lifting from 1½ percent in 2016 to 2 percent (mid-point of 1½-2½ percent range) by June 2017 holding at 2 percent thereafter.
The ‘gradual pick up’ suggests a little more ‘shape’ to the outlook beyond 2017 perhaps alluding to a return to the target range beyond the forecast horizon of December 2018. Certainly ‘tone-wise’ it’s a bit different to the phrasing in the SoMP overview which noted that “inflation is likely to remain below 2 per cent over most of the forecast period”.
The central rationale for the August move was set out as per previous communication: expectations around external conditions and growth were little changed but the weaker trajectory for inflation had been confirmed and with room for stronger growth and risks around household sector leverage seen as diminished, a further rate cut was viewed as improving prospects for sustainable growth and inflation returning to target.
Comments attributed specifically to ‘members’ highlighted areas of uncertainty or concern within the Board including: “…considerable uncertainty about momentum in the domestic labour market and the extent to which domestic inflationary pressures would rise over the next few years”; that for a forecast gradual rise in household consumption “there was some uncertainty about whether households would respond to developments affecting their disposable incomes by adjusting consumption growth or altering their saving rates.”; and that the “very high levels” of dwellings under construction “had increased the risk of oversupply in parts of the country”.
Around financial markets, members noted that ‘Brexit’ volatility had subsided but that market pricing for the Fed did not have another rate rise priced until late 2017. On the AUD, the minutes repeat the exact same wording that “an appreciating exchange rate could complicate” the support coming from low interest rates and previous exchange rate depreciation.
Having cut rates in August, the RBA is clearly in ‘watch and see’ mode. In contrast to the Jun-Jul ‘hiatus’ the Bank will not only be interested in growth and inflation developments but will now also be trying to gauge the impact of its May and Aug moves.
The Board is almost certain to keep rates on hold in September. However we continue to view the Reserve Bank as carrying an easing bias – implicit in its inflation forecasts and in our view in much of its rhetoric. However, we expect that downside risks around economic conditions will diminish sufficiently in coming months to see the Bank retain a more patient approach to its inflation objective. Accordingly we expect that the Bank will keep rates on hold over the remainder of 2016 despite an apparent easing bias.