The latest Reserve Bank Board minutes suggests that the decision to cut interest rates in December was largely due to the softening in labour market conditions and confirmation of the peak in resource investment.
- The Reserve Bank Board members conceded that the pull back in the mining sector was impacting the broader economy. “Members observed cost-cutting in the iron ore and coal industries was feeding through to related business services industries, resulting in some labour shedding”.
- A subdued inflation environment and downside risks to global growth will keep the Reserve Bank on an easing bias. “Recent data indicated that, to date, there had been a small decline in the growth of wages, which was consistent with the softening in the labour market seen over the past year”. CommSec is pencilling in the possibility of a further 25bps rate cut in February.
What does it all mean?
- The decision to cut interest rates by quarter of a per cent in December seems to have been more finely balanced that markets previously thought. In fact financial markets had almost fully priced in a rate cut at the December meeting, however the last two lines of the latest Board minutes suggest the Reserve Bank debated whether to pass through another rate cut or “wait for further information”.
- And on balance members decided on cutting rates largely due to the softening in labour market indicators. Internet and newspaper job advertisement had declined for eight consecutive months suggesting that employment growth will remain subdued in coming months. In addition the cost cutting measures across iron-ore and coal miners was “feeding through to related business services industries” – in effect further dampening confidence and activity in coming months.
- It’s clear that weighing against a rate cut was the marginally higher September quarter inflation reading, however forward looking indicators suggested inflation will continue to remain subdued. Not only was the strength of the Australian dollar keeping imported inflation low but a decline in wage growth provided further comfort that inflation should remain subdued – ensuring that Board members did not have to wait to see the full impact of previous rate cuts. They have been afforded the luxury of knowing that inflation looks well contained.
- Looking forward the Reserve Bank is certainly faced with a patchy landscape. Mining investment is set to peak in the near-term, however the short-term outlook for the non-resource investment remains weak. In addition the higher Aussie currency is having a detrimental impact on exports while the anticipated slowing in labour demand was also likely to dampen activity. As such it is likely that the Reserve Bank will continue to maintain an easing bias. CommSec is still pencilling in another quarter of a per cent rate cut in February.
- However the urgency to cut interest rates in coming months is likely to have lessened given the substantial stimulus provided in recent months. Commodity prices have also lifted, while the pickup in share markets, lift in house prices and a modest improvement in confidence should provide policy makers with a degree of comfort.
What do the figures show?
Minutes from the October 2012 Reserve Bank Board meeting
- More positive global outlook
“Globally, economic news over the past month had a slightly more positive tone than was the case a few months earlier. Importantly, there were further signs that the pace of growth had stabilised in China, contributing to a general stabilisation in key commodity prices. The US economy had continued to grow at a moderate pace, although the uncertainties posed by the ‘fiscal cliff’ remained unresolved.” - Resource investment pull-back
“The available indicators suggested that the Australian economy had expanded at around trend over the year to the September quarter. Mining investment had made a further contribution to growth in the September quarter (although the outlook had softened a little further). There were also tentative signs that dwelling investment was turning up, but the outlook for non-mining investment overall in the year ahead remained subdued.” - Slowing labour demand
“Members observed that cost-cutting in the iron ore and coal industries was feeding through to related business services industries, resulting in some labour shedding.”
“Leading indicators and information from the Bank’s liaison contacts suggested that labour demand had softened, which pointed to only modest employment growth in coming months”.
On housing activity
“Forward-looking indicators of residential construction over recent months, including building approvals, continued to point to a modest recovery in that sector over the period ahead. This was likely to be supported by the pick-up in dwelling prices, sales activity and rental yields over recent months. In addition, loan approvals had moved a little higher since the middle of the year.”
Outlook for rates
“At this meeting, the information on labour costs and softening labour market conditions suggested that the inflation outlook still afforded the Board some scope to provide additional support to demand. Further confirmation that the peak in resource sector investment was near, and that the short-term outlook for non-resource investment remained subdued, indicated that there was a case for the Board to provide that support. The Board considered whether to respond to this case in the near term or wait for further information. On balance, members saw merit in reducing the cash rate at this meeting.” - Imports of goods
The value of goods imported in November rose by 2 per cent in seasonally adjusted terms to $21.76 billion. The increase was driven by merchandise goods and the fuel and lubricants component. In original terms imports rose by 3 per cent.
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.
- Demographic Statistics are issued by the Bureau of Statistics each quarter. The figures include estimates of births, deaths, in-bound and out-bound migration movements and estimates of population change by State.
Data on imports of goods is provided monthly by the Bureau of Statistics. The data assists in gauging strength of domestic demand – spending by both businesses and consumers.
What are the implications for interest rates and investors?
- Interest rates are now clearly below long-term averages, inflation is in the middle of the target band, monetary policy is at a stimulatory setting and economic growth was near trend. All these factors allow the Reserve Bank time to get a more accurate picture of the economic landscape. The question is whether the bank has a target in mind for the cash rate. As such a February rate cut is still on the cards.
- The pullback in mining investment – largely due to soft commodity prices and high project costs – played a part in the decision to cut interest rates. Interestingly the Reserve Bank highlighted that the cost cutting measures was feeding though to other parts of the economy.
- Couple that view with the fact that inflation is expected to remain within the target band. And in line with Reserve Banks forecasts, it is clear that the Reserve Bank will continue to maintain an easing bias, allowing the Board to once again cut rates if it deems necessary.