The latest Reserve Bank Board minutes suggests that the decision to leave interest rates on hold in November was finely balanced as higher inflation offset a slowing domestic economy.
The Reserve Bank Board members conceded that the domestic economy had softened. “Overall, growth of the Australian economy had slowed from an above-trend pace earlier in the year, with recent indicators of activity suggesting that economic growth was more moderate in the September quarter.”
“After a long period of stability, the unemployment rate increased in September, which was consistent with other indicators that had suggested the labour market had softened in recent months” … “Household consumption appeared to have slowed from the strong pace seen earlier in the year to a pace around, or a little below, trend in the September quarter.”
Although inflation looks to have bottomed out the Reserve Bank maintains an easing bias. “Members considered that further easing may be appropriate in the period ahead. However, at this meeting, with prices data for the September quarter slightly higher than expected and recent information on the world economy slightly more positive, the Board judged that the stance of monetary policy was appropriate for the time being”. As such CommSec expects the Reserve Bank to cut interest rates by a further 25bps in February.
What does it all mean?
The latest Board minutes show that the Reserve Bank continues to maintain an easing bias; however the decision to keep rate on hold earlier this month seems to be more finely balanced than previously thought. In fact there was an array of factors that were discussed by Board members, including the rise in unemployment, modest weakening in household consumption and overall softening in domestic economic growth.
It is important to note that while the likelihood of a further rate cut has increased in a broader sense, the Reserve Bank is still 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 for a month or more, get a better gauge of the impact of recent stimulus, and cut rates if there is a significant deterioration in the growth outlook.
To some degree it seems like the higher than expected September quarter inflation reading was the deal breaker when it came to providing another rate cut in November. While inflation has bottomed out it is unlikely to rocket significantly higher, rather it should still remain comfortably within the Reserve Banks 2-3 per cent target band over the coming year.
Interestingly the Reserve Bank was a little bit more upbeat about the improvements that have taken place on the global front. In particular members noted that the Chinese economy “may have stabilised”, while the European sovereign debt issues had improved. Importantly while the global economy is looking more solid it is still early days and the risks remain to the downside. As such CommSec expects the Reserve Bank to cut interest rates by a further quarter of one per cent in the next couple of months.
The full text of the RBA Board minutes can be found here.
