RBA May board minutes consistent with rate cut being a ‘fine tuning’ move but scope remains to ease if warranted.
There was limited new information in the RBA’s May Board meeting Minutes over and above that contained in the quarterly Statement on Monetary Policy published a few days after the Board meeting.
The key point is that it was not one factor that led the Bank to ease policy further in May. That said, the slightly lower-than-expected Q1 CPI print was certainly a factor, even if it only confirmed the forecast slowing in inflation.
The Bank also pointed to credit growth remaining subdued despite strengthening housing market conditions and that growth was expected to remain “below trend for a while” as other reasons to use “some of the scope to ease policy” at the May Board meeting. In terms of the below-trend growth outlook, the Bank nominated the high Australian dollar, fiscal consolidation and slowing business investment as the key drivers of its view. The 4 US cent depreciation of the Australian dollar since the Board meeting, if sustained, will be welcomed by the Bank. The persistently high currency had been a factor in pushing the cash rate lower to support domestic activity. In our view, because lending rates are already quite low in Australia, a better mix of overall financial conditions would be a somewhat lower currency combined with no further cuts to interest rates (as lower rates may encourage undue financial risk taking, albeit these risks are probably minimal in the current environment where the appetite for debt is low.)
Combined with our subdued outlook for overall business investment, however, and an expectation that the currency is likely to remain elevated for a while yet, our view is that the cash rate is still more likely than not to be lowered a little further. We have a 25bp cut pencilled in for later this year.
Interestingly, the Bank noted that the mining investment outlook had become less uncertain. This is because a handful of very large LNG projects now dominate the mining investment pipeline and these projects are less susceptible to commodity price movements given they are tied to long-term contracts. (That said, our view is that further LNG projects seem unlikely, at least for a while, after the current crop are completed).
As always, the RBA is watching high-frequency information on the economy very closely, particularly for signs that the drivers of growth are transitioning from mining investment to other sources of growth. As the Minutes note, housing market activity is picking up and household spending is expected to grow at around trend rates. Further, a sustained lower currency – far from guaranteed in the near term – would provide support to growth. Nevertheless, the looming peak in mining investment and, in our view, sharp contraction from around mid 2014, will necessitate a noticeable pick up in non-mining activity over the next year or two. With plenty of spare capacity currently in the Australian economy – as identified in business surveys and labour market conditions – it remains highly uncertain whether this transition will prove to be smooth.
Any evidence that inflation could undershoot the Bank’s middle-of-the-band forecasts would also be important in supporting the case for lower rates.
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Greg McGuinness, Senior Relationship Manager – ANZ
Image credits: By Danausi (Own work) [Public domain], via Wikimedia Commons