Global Markets Research
RBA Board Minutes – July 2013
RBA is adhering to an easing bias, albeit more muted than earlier in 2013, noting low inflation “could still provide some scope for further easing, should that be required to support demand”.
Despite the AUD’s recent fall, Board members noted that the AUD “remained at a high level”. The Board also noted that further potential AUD falls are possible (and desirable), and “would help foster a rebalancing in growth in the economy”.
The AUD is now playing its traditional role of buffering commodity prices.
RBA signalled it sees bond market ructions emanating from perceptions that Fed will move earlier than expected to “taper” the rate of bond purchases as being a little overdone, with the Fed’s recent statements adding little new.
We still see another RBA cash rate cut to 2½% in August, after next week’s QII CPI which is likely to reveal tame prices.
The RBA Board clearly signals that it is still mulling the possibility of another cash rate cut if demand conditions warrant more stimulus. But this bias is somewhat more muted than earlier in 2013 given the solid AUD slide in recent months (TWI has dropped by 12% since mid-April). Hence, the Board notes low inflation “could still provide some scope for further easing, should that be required to support demand”.
The central bank still appears to be comfortable with the international outlook. The Board minutes note that growth in Australia’s major trading partners is broadly in line with RBA forecasts. According to the minutes, recent Chinese indicators point to “steady growth of the Chinese economy”. The Board also sees the US recovery “continuing at a moderate pace, notwithstanding that fiscal consolidation was weighing on private demand””. The RBA also notes that in Japan, economic activity “had strengthened further in recent months” and that the euro economy “remained weak”. Overall the “growth of Australia’s major trading partners remained close to its long run average in recent months”. The central bank also noted that while commodity prices continued to decline they were “little changed in AUD terms over the past two months because of the exchange rate depreciation”.
Prior interest rate cuts (over 2011 and 2012) were aimed at supporting the Australian economy through the Euro area crisis and the contagion that eventuated. Given the stabilisation in the international outlook, recent interest rate cuts have been aimed at supporting the domestic economy through the transition to non-mining led growth. The minutes also said that given the recent exchange rate decline and the “substantial degree of monetary stimulus already in place” the Board opted to leave rates on hold in July judging policy “to be appropriate for the time being”. Domestic economic conditions have remained mixed over recent months. QI GDP growth (2½%pa) was below trend. Partial data since then has not materially changed this picture of lacklustre growth as the mining sector comes off the boil. June unemployment rate rose to 5.7% on the back of a rising participation rate. But the labour market, although soft, is still looking to be in reasonable shape and far from “falling off a cliff”. On this score the Bank opines that “forward looking indicators of labour demand implied only modest growth in employment in the months ahead”.
The RBA thinks that mining investment has probably peaked and will continue to taper off, but could remain at relatively high levels for the coming year. Elsewhere, the outlook for non-mining investment “remains modest”. Business investment in QI fell with declines in THE mining and non-mining parts of the economy. Business surveys continue to indicate the generally subdued nature of sentiment across all business sectors, but “most notably in mining and manufacturing”.
On a brighter note, the central bank sees conditions in the housing sector continuing to improve. It notes that forward looking indicators for new construction continued to be favourable, with building approvals and loan approvals rising noticeably in recent months, including for new dwellings. Indeed, record low mortgage interest rates have engendered anupward shift in housing market activity over HI 2013.
Nothing in the July Board minutes makes us uncomfortable with our view that another RBA cash rate cut of 0.25% is coming, most probably in August, after the QII CPI release on 24 July. The RBA still sees a benign near-term inflation outlook, even with some price effects from the lower AUD. A likely upwards drift in the unemployment rate should help moderate private sector wages growth. But moderate private sector wages growth is needed to contain “domestic” or nontradables inflation which is running at 4%pa. Especially in view of the recent AUD slide which could boost current subdued tradables inflation down the line.