RBA Minutes - Australia without a strong mining sector

In November, the RBA left rates on hold, not exactly what the market expected. In the minutes issued yesterday, the RBA continued to develop the more dovish tone that began in the September minutes. While markets want more easing than the RBA will deliver in the short term, the RBA appears set to ease once more before the end of the calendar year, as it aligns monetary policy to lower forecasts of global growth, and the reality of an Australian economy without a strong mining sector.

Although the prior RBA minutes were largely silent on inflation, these minutes address that silence. Specifically, they tend to more fully detail the inflationary influence of the carbon price, as well as the outlook for inflation. In general, the pace of global growth seems to have been the deciding influence on the RBA, who remain concerned about the domestic economy in the absence of a strong mining sector.

This note provides a summary and comments on considerations for monetary policy and finally, some brief conclusions. The pertinent details from each section of the Minutes are provided below.

Global assessment

Overall, the assessment of global growth was slightly more upbeat than the prior month, with assessment that regional and Chinese growth having improved. Whereas last month, the RBA noted how Chinese growth had slowed, this month the RBA noted that a stabilisation of growth had occurred. As the RBA note,

International economic news over the past month was, on balance, more positive than in recent months, though earlier weak data had led forecasters to expect further delay in a pick-up in global activity. The pace of growth in China appeared to have stabilised in response to the earlier fiscal and monetary stimulus, with a pick-up in infrastructure construction. Timely measures of production and spending were mixed, but had generally been stronger in recent months.

Importantly, this assessment is somewhat dated, as general assessments of global growth have declined in recent weeks, in line with the decline in global equity prices. We would expect that the recent decline in global growth expectations should soon be acknowledged in RBA releases.

Domestic assessment

As expected the RBA devoted a significant discussion to the CPI, where recent readings were seen as “a little higher than had been expected”, which reflected, “in part, the introduction of the carbon price, which had had a noticeable effect on electricity and gas prices”. Apart from the carbon price, the impact on tradable inflation was observed to be “waning”.

Growth was observed to have slowed, “from an above-trend pace earlier in the year”, while the labour market was observed to have “softened in recent months”. While consumption appeared to have also slowed, the pace of retail sales was observed to be adequate and signs of improvement were apparent in the housing market. Moderation of activity in the mining sector was acknowledged, and the RBA remains unsure as to whether the rest of the economy might be able to offset that mining weakness. As the RBA note,

Members observed that business surveys suggested that conditions were a little below their long-run average level. Conditions in the mining sector had declined since earlier in the year, but had improved in retail and manufacturing to around long-run average levels. Weaker sentiment in mining apparently reflected the decline in bulk commodity prices over recent months and was consistent with the outlook for more modest growth in mining investment. Outside the mining sector, indicators of private non-residential investment remained relatively subdued, although business credit grew in September, after two months of essentially no growth, and non-intermediated funding had increased. Exports were estimated to have been weak in the September quarter, owing to softer global demand for coal.

Financial markets

A discussion of the significant developments in the Euro area and the US was evident in the Minutes, where the lack of “unsettling news” from Europe tended to support financial market pricing, as evidenced by share market pricing and declines in peripheral European bond yields. Yet, despite the positive developments, the RBA highlighted that rates are very low,

Following the October cash rate announcement, most lenders in Australia had reduced their standard variable housing loan rates by around 20 basis points. The average interest rate on outstanding housing loans was now about 75 basis points below the post-1996 average, while rates on small and large business loans were 75 and 125 basis points below average. Competition for deposits remained strong, with deposit funding accounting for more than half of total bank funding.

Considerations for monetary policy

Generally, the RBA indicated the global growth forecast had stabilised, although significant risks still remained. Domestic growth forecasts had been lowered as a result of the moderation of activity in the mining sector, and that uncertainty remained about offsetting the weakness that emanated from the mining sector, even with lower rates. These considerations, among others, left the RBA on an easing bias, as they indicated in the following,

The Board's decision at the October meeting to reduce the cash rate had pushed borrowing interest rates a little lower relative to their average levels. The effects of the earlier reductions in the cash rate were, meanwhile, continuing to work their way through the economy, and members expected that further effects of these changes were yet to be observed. 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.

Conclusion

In the minutes released yesterday, the RBA indicated that it remained uncertain about the pace of growth in the domestic economy, in the wake of the recent moderation in mining related activity. Specifically, a decline in global growth, as recently experienced in the period subsequent to the minutes, combined with the gradual softening in the labour market, has given the RBA further scope to align the cash rate to lower global growth.

While inflation remains a concern for the RBA, softening of overall domestic growth remains a problem and cause for uncertainty, in the absence of continued mining growth. This uncertainty left the RBA on an easing bias, as the minutes indicate. While the global outlook for global growth had improved at the time of the Minutes, they have declined since, and this decline may well be enough to trigger a move by the RBA in December. No move in December would mean no action would probably be taken until February of 2013, as the RBA does not meet in January.