The latest Reserve Bank Board minutes confirms that the decision to leave rates on hold in July was largely due to a modest improvement in economic conditions and also given the sizeable rate cuts provided over the past few months.
- The Reserve Bank was focused on the global economy…“Members noted that the possibility that the situation in Europe could deteriorate again and spill over to other economies remained a substantial risk”…“In contrast, developments had been more positive for the Chinese economy”.
- Downside risks keeps door open to a further rate cut. “Recent data had pointed to weaker prospects for global growth”.
- While domestically “members noted that growth in much of the non-resource economy had remained modest, particularly in those industries under pressure from the high exchange rate and the weakness in the housing sector”.
- Next week’s release of the June quarter inflation data will be the focus. “Members noted inflationary pressures overall remained contained”… “Members observed that there was also tentative evidence that productivity growth had picked up over this period”.
What does it all mean?
- The latest Reserve Bank Board minutes maintain an easing bias, however the sense of urgency to cut rates further has been reduced. In effect the Reserve Bank is back in a holding pattern. The added level of insurance taken out in the last few months ensures the Reserve Bank can afford to sit back and get a better gauge of what effect the rate cuts have had in spurring activity.
- Interestingly the minutes make mention of the general health of the domestic economy, with the recent round of domestic data highlighting “the divergence between the resource and non-resource economies”.
- The mining sector continued to dominate activity while conditions in construction, retail trade and manufacturing were well below average. The patchiness of the recovery will ensure that the Reserve Bank will maintain an easing bias; however a commitment to further rate cuts would more than likely be as a result of global factors.
- On the global front, the slowdown in China will be closely watched by officials. And while the Chinese economy has slowed in recent times; members noted that “developments had been more positive for the Chinese economy”.
- The stimulatory measures that have been put in place should result in an improvement in activity levels in the latter part of this year.
- The downside risks to global growth were discussed and Europe remains the watching brief. European growth has continued to deteriorate in recent times and the ongoing sovereign debt concerns emanating from some of the peripheral European economies is a key concern. This is another reason that the Reserve Bank would consider providing a further degree of stimulus to the domestic economy, if deemed necessary.
- The anecdotal evidence suggests that activity levels have shown signs of improvement in recent months. House prices have started to rise, retail activity is starting to benefit from the Federal government handouts, which should in turn support businesses. Granted there are still an array of sectors that are finding conditions difficult, however the tough trading conditions is more as a result of a lack of confidence than any significant structural issue.
- Despite the modest fall in seasonally adjusted terms, the car sales figures in recent months have been relatively encouraging. In original terms, car sales hit a record high in June and even in seasonally adjusted terms sales are up just shy of 20 per cent on a year ago. Clearly the improvement in car affordability is the clear driver.
What are the implications for interest rates and investors?
Importantly from an economic sense, interest rates are below long-term averages, inflation is at the lower end of the target band, monetary policy is at a stimulatory setting and economic growth is picking up pace albeit from below trend levels – allowing the Reserve Bank time to get a more accurate picture of the economic landscape.
Looking forward, the Reserve Bank will continue to maintain an easing bias, allowing the board to once again cut rates if it deems necessary. And given the downside risks to global growth the likelihood of a August rate cut cannot be ruled out. Inflation data released next week will be the key.
18 July 2012