The latest Reserve Bank Board minutes confirms that a rate cut is on the cards for next month provided inflation remains in check.
“Slower growth in demand could be expected to result in a more moderate inflation outcome, then a case could be made for a further easing of monetary policy. The Board would have the opportunity at its next meeting to review the inflation outlook based on comprehensive new data on prices.”
The Reserve Bank Board members conceded that for the domestic economy “recent data suggested that output growth was somewhat below trend over 2011, despite private investment spending underpinning the fastest growth in domestic demand for four years”.
Board members noted that while global growth was at “a below trend pace in 2012” there were still significant downside risks particularly given that “financial problems in Europe continued to be a potential source of adverse shocks to the world economy”.
What does it all mean?
It’s clear that Reserve Bank Board has certainly become more cautious on the outlook for the domestic economy. The latest Reserve Bank board minutes highlights that the case for a rate cut was compelling – especially given that Board members acknowledged that growth outcomes “were somewhat below trend”. Subdued retail activity, the higher Aussie dollar, and slump in home construction have been clear dampeners on growth.
Interestingly the Reserve Bank is well aware of the importance of home construction in driving domestic growth. It seems that Board members spent considerable time examining the reason for the lack of housing activity. A rate cut would be supportive in boosting activity in the housing sector.
While the minutes suggest that the Reserve Bank maintains an easing bias, the final hurdle to a rate cut next month remains the quarterly inflation data – released next Tuesday. In our view if the inflation result comes in at or below 0.7 per cent for the March quarter, it should provide the Reserve Bank with additional degree of comfort and allow policy makers to cut interest rates by 25 basis points. In fact we expect headline inflation to be of a much more subdued nature coming in around 0.5 per cent with underlying inflation at 0.6 per cent for the March quarter – in short providing the Reserve Bank with the valid scope to cut rates.
Interestingly the downside risks to global growth were discussed and Europe remains the watching brief. Global growth is below trend levels and sovereign debt concerns emanating from some of the peripheral European economies like Spain seem to be once again gathering pace. The threat of contagion to larger economies across the European Union is a key concern and is another reason that the Reserve Bank would consider providing a modest degree of stimulus to the domestic economy.
What is the importance of the economic data?
The Reserve Bank releases minutes of its monthly Board meeting a fortnight after the event. The minutes give a guide to Reserve Bank thinking on interest rate settings.
What are the implications for interest rates and investors?
CommSec still believes that the Reserve Bank should cut rates again, and we are pencilling a move next month. In short, economic growth is still below trend and inflation is well controlled. The Reserve Bank can inject momentum with few, if any, downsides for the economy.
