RBA Board Minutes – September 2014

From
  • The RBA maintained its guidance that “the most prudent course was likely to be a period of stability in rates”.

  • The tone was in line with previous Board minutes, but there was a strong focus on the housing market and in particular the Bank’s growing concerns around the pace of house price inflation.

  • The Board meeting was held before the recent Australian data batch which included GDP, retail trade, building approvals, housing finance and employment – all of which showed that the growth pulse of the economy is a bit stronger than assumed by the RBA.

  • Market pricing for a rate cut has waned significantly over the past two weeks. The market is pricing just a 12% chance that the RBA eases policy further.

  • The AUD has fallen around 4 US cents since the Board meeting which means that monetary conditions have further eased.

Labour market conditions had remained subdued: RBA Board

Labour market conditions had remained subdued: RBA Board

The September RBA Board Minutes look a little dated. The RBA Board meeting preceded the recent data batch which showed that the Australian economy is travelling along better than what the RBA has assumed in its growth forecasts. And the recent slide in the AUD, if maintained, means that the RBA is likely to upgrade its growth and inflation forecasts.

The Minutes are “neutral” in their outlook for monetary policy, as they have been this year. But concerns change over time. One way to assess the evolution in the Board’s thinking on considerations for policy is to look at what has changed in the narrative from the previous month’s minutes.  And on that score, the Bank has some growing concerns around house price growth. The Minutes note that, “policy also needed to be cognisant of the risks to future growth that could accompany a large further build‑up in asset prices, particularly if that was associated with an increase in leverage.”  Indeed, a decent chunk of the Minutes are attempts to jawbone the housing market.

Stevens just recently stressed that the RBA has done as much as they can in creating a backdrop that should support economic growth1.  Stevens all but ruled out any further rate cuts by stating that “further inflating an already elevated level of house prices seems an unwise route (to reduce unemployment)”.  House price data for August showed that prices surged again in Sydney and Melbourne over the month. And the most recent loan data showed that investor loans are around their highest share on record of total loans.

On the labour market, the Board stated that “labour market conditions had remained subdued” and that “forecasts of a period of below‑trend growth in economic activity meant that it would be some time before the unemployment rate declined consistently”. The most recent jobs figures (published after the September meeting) recorded a huge 121k spike in employment and a large 0.3ppt fall in the unemployment rate to 6.1%.  Cutting through the monthly noise shows that trend employment growth is running at 20k on a three‑month basis. Employment growth around this level is in line with a flat unemployment rate. And coupled with the positive leading indicators suggests that the RBA is, in our view, being overly pessimistic in its assessment of the jobs market. The risk is that the unemployment rate starts to decline ahead of the RBA’s expectations.

There was very little from the Bank on inflation given the SMP was published last month just after the QII CPI.  Nonetheless, we note that the softer AUD, if sustained, is likely to mean that inflation runs ahead of RBA forecasts (the latest RBA forecasts used an AUD worth 93 US cents).

The good economic data reads since the last RBA meeting, coupled with the slide in the AUD, has seen market pricing for a further rate cut wane substantially. We have been arguing for some time that market pricing was overstating downside risks to the growth and inflation outlooks. Our base case has the RBA on hold until Q1 2015 where we have pencilled in a rate hike.

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1“The Economic Scene” – Glenn Stevens address to a CEDA Luncheon, Adelaide 3 September 2014

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