CBA Economics: RBA’s neutral policy bias reiterated in Board minutes

• The February Board minutes reiterated the RBA’s neutral policy bias that was evident in the February Statement on Monetary Policy.

• The QIV Wage Price Index data (released Wednesday 19 February) will be an important guide to near‑term inflation risks.

• The RBA’s “period of stability” in policy settings should extend through to late 2014 when we expect a modest tightening cycle to get underway.

Diana Mousina

The February Board minutes contained few surprises given the release of the quarterly Statement on Monetary Policy (SMP) at the beginning of February. The RBA’s “neutral” policy bias was again evident in the wording that “the most prudent course would likely be a period of stability in interest rates”.

The general tone in the February Board minutes is that the RBA is a little more relaxed about growth prospects (both at home and abroad) and a little less comfortable with the inflation outlook. The RBA noted that there are several possible explanations for the higher‑than‑expected QIV CPI. There could be an element of “noise” that occurs in economic data, the pass‑through from a lower exchange rate could be occurring more quickly than usual, the pass‑through from slow wages growth may be occurring more slowly than usual or there may be less spare capacity in the economy than previously thought. It is likely that it is a combination of all of these factors at work.

The RBA raised their inflation forecasts for 2014, as published in the SMP, with the June 2014 forecasts now exceeding the top side of the 2‑3% target band. The higher inflation forecasts are mainly due to the effects of a weaker AUD lifting import prices. The wage price data for QIV is released on Wednesday which will be an important guide for near‑term inflation risks. We are expecting quarterly wages growth around 0.7% (2.6%pa) which is slightly above market expectations of a 0.6% increase (2.5%pa).

We see the overall inflation risks as being skewed to the high end of the RBA’s new inflation forecast ranges. The RBA is still placing weight on the idea that slower wages growth will eventually produce a step down in what has proved to be very sticky domestic inflation rates. This step down is needed to offset higher import prices flowing from a lower Aussie dollar. But we suspect that the gap opening up between wages growth and domestic inflation is an indication of structural inflation drivers at work. From a policy perspective, the RBA has to run harder against the cyclical CPI component to offset the structural CPI pressures.

The RBA’s upwardly revised GDP forecasts come from the effects of a lower Aussie dollar stimulating activity in the traded goods and services sectors, a firmer housing construction outlook and clear signs of rising mining export volumes. The minutes noted that the central bank’s outlook for the labour market was little changed. This meeting occurred before the January employment data that saw the unemployment rate rising to a 10‑year high of 6.0%. The RBA has, however, been expecting a rise in the unemployment rate. The latest January data would not have caused the RBA to change their view on the labour market. The minutes also mentioned that labour market conditions lag economic growth. The various leading indicators were more positive for economic activity around the turn of the year which is positive for the labour market. The RBA also commented on the labour force participation rate, noting that “the ageing of the population accounted for around half of the decline in the participation rate over the past few years”.

On the global outlook, the RBA appears to be broadly comfortable with the global backdrop. The risks to global growth are evenly balanced and the Bank has notched up its forecasts for Australia’s trading partner growth to 4½% in 2014 and 4% in 2015. This is a small upgrade from previous forecasts and reflects improving conditions in the advanced economies.

Our forecasts have the RBA’s “period of stability” in interest rate settings extending through to late 2014 when we expect a modest tightening cycle to get underway.