FIIG - The Fixed Income Experts

News and Education

RBA Minutes: less dovish, although easing bias remains

by Dr. Stephen Nash | May 22, 2013

RBA minutes

RBA guidance on monetary policy continued with the Minutes of the recent meeting of 7 May, as released on 21 May, for the meeting being, once again, consistent with the recent Statement of Monetary Policy, which was released on 10 May 2013. Here, the RBA painted a picture of an economy that needed additional help, so as to assist with the transition from mining to non-mining led growth; such help still appears necessary.

Minutes: International economic conditions assessment

Overall, the assessment of global growth was consistent with that given over the recent months, where global growth was seen as being around trend. While the US was seen as growing, although the fiscal contraction was seen as a drag on growth, Europe was seen as still being in an ongoing recession. Importantly, regional growth was acknowledged to have slowed a little, and commodity prices were observed to have eased,

Growth in the Chinese economy had slowed a little in the March quarter, primarily reflecting weaker consumption growth, but had remained a little above 7½ per cent, which was the authorities' stated target for growth. Strong infrastructure investment and demand for residential property were likely to continue to support steady growth in the economy in the coming quarters. In east Asia, growth appeared to have slowed a little in the March quarter after picking up quite strongly at the end of 2012; consumption in the lower-income economies continued to grow at a faster pace than in the higher-income economies. In Japan, there was increased optimism about future economic prospects following the fiscal and monetary policy initiatives and tentative signs of increased activity.

Minutes: Domestic assessment

Inflation was observed to have declined, and to have been a little lower than expected, where underlying inflation was observed to be, ‘just below ½ per cent in the March quarter, and a little below 2½ per cent over the year’. While tradeable inflation had declined, non-tradeable inflation had risen. With the recent decline in the AUD, this may mean that tradeable inflation will rise, and not offset the rise in non-tradeable inflation. Also, the following data, despite the pluses and minuses in different segments of the economy, was observed to be consistent with sub-trend growth:

  • subdued labour market, where the RBA liaison indicates general caution regarding hiring from firms and wage growth was seen as being moderate,
  • consumption has strengthened, where the volume of retail sales was seen as having had ‘increased noticeably’,
  • housing prices had lifted, along with auction clearance rates and new building approvals were anticipated to increase,
  • business sentiment and conditions were still soft indicating that firms were cautious about expansion, and
  • mining investment was “changing”, from volatile coal investment to more stable LNG investment

Importantly, the RBA noted that monetary policy was gaining traction, as the RBA note below,

The effects of stimulatory monetary policy were continuing to emerge. Improved conditions in the housing market and strong population growth were also expected to support dwelling investment and household spending more generally. While growth in business investment outside the mining sector looked to have been a little softer than expected in the first half of 2013, it was forecast to pick up to a moderate pace over the remainder of this year and into 2014. This was consistent with the most recent ABS survey of firms' capital expenditure plans.

Minutes: Financial markets

Of most importance for the RBA were the developments in monetary policy as recently initiated by the BoJ. As the RBA noted,

Members commenced their discussion of developments in financial markets over the past month with the announcement by the Bank of Japan (BoJ) of a range of policy measures that sought to achieve its 2 per cent inflation target. The new policy measures included a shift in the BoJ's operational target from an overnight interest rate to a measure of the money base, and were more expansionary than had been anticipated by markets. Overall, the measures were expected to double the BoJ's holdings of Japanese government bonds over the coming two years and thereby boost the size of its balance sheet to nearly 60 per cent of GDP. Members noted that, while the absolute size of these purchases was smaller than the US Federal Reserve's comparable program, they would be much larger relative to the size of the economy.

Elsewhere, the RBA noted that both peripheral European bond yields and Australian corporate bond yields had fallen. These declines in yield tended to reflect a general level of calm within the financial markets.

Minutes: Considerations for monetary policy

In the context of lower than expected domestic inflation with sub-trend growth the RBA maintains that there is still scope to ease monetary policy further. Transitioning from mining-led growth to non-mining led growth remains of concern to the RBA and these conditions, among others, jointly created the scope to ease policy. These observations are apparent in the final paragraph of the RBA minutes which is noted as follows,

For some months the Board had considered that the inflation outlook provided scope to ease monetary policy further, should that be necessary to support demand. Members recognised that the effects of the earlier reductions in interest rates were still working through the economy. Nonetheless, growth was expected to be somewhat below trend for a while, and the inflation outlook had, if anything, been revised down slightly. Members were conscious of the strengthening conditions in the housing market, but also noted that, thus far, credit growth had remained subdued. Taking all the factors into consideration, the Board decided that some of the scope to ease policy should be used at this meeting. It judged that a further reduction in the cash rate was appropriate to encourage sustainable growth in the economy, consistent with achieving the inflation target ([emphasis added]).

Treasury forecasts

While somewhat more optimistic, the RBA expectations of slightly sub-trend growth during 2013, with a return to trend thereafter, are supported by the treasury forecasts as indicated in a recent speech by the Secretary to the Treasury,

While it will be significant in isolation, we do not expect the increase in resource production to be enough to offset the decline in resource investment ... This highlights the need for a second transition in the economy, to growth driven by the non-resource sectors. This transition will be supported by low interest rates, but challenged by continued weakness in the global economy and a persistently high Australian dollar, even after the welcome falls in the past week. Taken together, these factors lead us to forecast real GDP growth of around 2¾ per cent and 3 per cent in 2013-14 and 2014-15, or close to trend growth. However, as the Treasurer has emphasised, there is a risk that these transitions will not be seamless – significant changes in the economy rarely are ([emphasis added]). (“Budgeting in Challenging Times”, Speech to the Australian Business Economists, 21 May 2013, Dr. Martin Parkinson PSM, Secretary to the Treasury).


While the minutes of yesterday mentioned familiar themes, the minutes also pointed out that monetary policy is gaining some traction; that easing will have limitations. Expecting more than one more easing may, at this time, be too optimistic, assuming that nothing dramatic occurs on the global scene in terms of growth perceptions. Specifically, in the minutes released yesterday, the RBA indicated that the domestic economy is still expected to grow below trend and that the inflation rate outlook still remains very much contained. However, recent declines in the Australian currency may have impacts on inflation which the RBA will be keen to assess in detail.

Despite more recent developments, it is fair to say that domestic growth is definitely not where it should be, or where the RBA expects that it should be, given current monetary stimulation. We estimate that cash rates will average around 2.75% for 2013 and by the end of the year, they should be around 2.50%. Apart from other things, a cash rate that equals the medium term inflation rate will mean that investors need to obtain better returns, when compared to cash, in the fixed income markets so as to smooth turbulence from the in equity markets.