Given recently accumulated information on demand and the rate of inflation, together with the revised forecasts that had been presented, members considered it appropriate for monetary policy to be eased.

The Reserve Bank Board members conceded that activity levels were vastly different across sectors. “Conditions faced by many firms not exposed to the mining sector remained weak… particularly difficult in parts of the building, construction and manufacturing industries, as well as for many retailers”.

If the recent fall in the Australian dollar are sustained it will help to alleviate pressures on export orientated firms and provide a modest degree of stimulus across the economy.

Board members noted that while the fundamentals for housing remained strong it was unlikely that lack of housing activity will turn around in the near future. “Demand for housing finance had eased in the past few months and recent data suggested that dwelling prices had continued to decline… forward-looking indicators implied little prospect of an imminent recovery in housing construction.”

What does it all mean?
Well it was hardly a surprise that there wasn’t anything significantly new in the minutes of the last Reserve Bank Board meeting. Especially considering that since the rate cut and the accompanying statement, we have had the release of the Statement on Monetary Policy and also a speech by Reserve Bank Assistant Governor Lowe. If anything the minutes tend to confirm the view portrayed last week, when the Reserve Bank released its latest growth and inflation forecasts.

It is clear that Board members remain concerned about the global economic outlook. The European debt crisis continues to “cloud the global outlook” and has played a part in the more flexible stance by policy makers when it comes to interest rates. Inflation is well contained and the Reserve Bank is focussed on providing a degree of stimulus to boost confidence and support activity. At present the variable mortgage rate is only just below “normal” and if the risks to growth remain further rate cuts are likely.

Interestingly the Reserve Bank spent time discussing the weakness in housing activity. The Reserve Bank is well aware of the importance of home construction in driving domestic growth. And the lack of new building and ongoing decline in house prices is a clear dampener on overall activity. In addition while the Reserve Bank believed that the fundamentals for housing remains strong, the Minutes highlighted that there was “little prospect of an imminent recovery in housing construction”. In effect providing the Reserve Bank with further validation to provide a deeper rate cut.

Overall, the Reserve Bank Board minutes paint a mixed picture of the Australian economy. The mining sector continues to dominate the growth outlook with a strong pipeline of investment, however conditions remained weak in the manufacturing, construction, wholesale and retail sectors. With all manner of diverging trends, and downsides risks to the global economy Board members don’t appear to be entirely comfortable at present, and as such further rate cuts are likely – especially given the Reserve Bank’s view “that inflation was likely to remain in the lower half of the target range over the foreseeable future”.

What do the figures show?
Minutes from the May 2012 Reserve Bank Board meeting
More RBA interest in housing
“Members were briefed on the continued weakness in the housing market generally and residential building activity in particular. Demand for housing finance had eased in the past few months and recent data suggested that dwelling prices had continued to decline, although there were tentative signs that the pace of decline had been more gradual overall in recent months. Despite dwelling prices declining relative to incomes and rises in rental yields, forward-looking indicators implied little prospect of an imminent recovery in housing construction. Information from liaison suggested that households were unwilling to commit to contracts for new dwellings because of concerns about job security and declining dwelling prices”.

RBA on bank funding costs
“At the margin, wholesale funding costs had declined over recent months, though they remained higher, relative to benchmark rates, than in mid-2011, and the lagged effects of this were still working their way through the funding structure. The rise in funding costs had led banks to increase their lending rates over recent months by around 10–12 basis points”.

Weak domestic economy
“Members were briefed on the updated staff forecasts. The central estimate was for GDP to grow by around 3 per cent over 2012 and 2013, although employment growth was expected to remain subdued in the near term. Forecasts of mining investment had been revised higher, with information from liaison and ABS data indicating more work in the pipeline than had previously been expected. This investment was anticipated to provide stimulus to a number of other sectors, but growth outside of the mining sector was expected to be below trend in the near term, affected by the high exchange rate, softer government spending and subdued conditions in the housing market and building industry more generally. The forecast for export growth had been revised lower, largely reflecting a reassessment of the ability of mining companies to utilise new port and transport capacity fully in the near term, along with weaker manufacturing exports”.

RBA on inflation
“The March quarter CPI had confirmed that, in underlying terms, inflation had slowed over recent quarters after a rise during the early part of 2011. The staff assessment was that inflation was likely to remain in the lower half of the target range over the foreseeable future, with cost pressures expected to be contained given the forecast for moderate growth in the economy.”

Mixed global growth
“Global economic conditions outside of Europe appeared to have stabilised over recent months, although sentiment remained somewhat fragile. The US economy had continued to expand at a moderate pace. Indications were that growth had slowed to a more sustainable pace in China, and activity had generally picked up elsewhere in east Asia. Even so, activity in the euro area was still contracting”.

Europe the key focus
“With financial markets remaining unsettled, the risks emanating from Europe continued to cloud the global outlook”
“Members noted that while European leaders had made some progress in addressing fiscal imbalances and implementing structural reforms, much work still needed to be done. Further, the task continued to be complicated by the negative feedback loop between fiscal consolidation, private-sector deleveraging and weak growth.”

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?

• Europe remains the watching brief. Global growth is below trend levels and sovereign debt concerns emanating from some of the peripheral European economies 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.
• The recent slide in the Australian dollar will provide an additional degree of stimulus supporting export orientated sectors including agriculture and manufacturing. In addition if the recent falls are sustained it would help to provide a modest boost for the beleaguered domestic tourism sector. Not only would more tourists considered holidaying in Australia but also spend more in terms of the domestic Aussie currency.
• CommSec still believes that the Reserve Bank should cut rates again, and we are pencilling the next move to be in August. 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.

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