RBA rate decision – more reasons to be patient

While the RBA needs to do more, the scope for additional easing is still limited at this time, even though the Federal government has finally woken up to the fact that regional growth is declining. While lower rates had been fuelling established house price growth, not the construction that the RBA really wants, the recent decline in equity prices may soon see those gains moderate substantially. It looks like the RBA is awaiting further weakness in the Australian dollar, so as to allow the switch from mining sector growth to non-mining sector growth to proceed at a faster rate.

Statement

The following points are evident from the statement:

• Global growth: Global growth comments were much the same as the prior meeting, where the RBA noted that global growth was somewhat lower than trend, yet failed to acknowledge the recent slowdown in regional growth as we are witnessing at this time, especially a slowing in Chinese growth.
• Financial market developments: In contrast to the prior statement, the RBA acknowledged the increased volatility in financial markets, as noted below,

Globally, financial conditions remain very accommodative. However, a reassessment by the market of the outlook for monetary policy in the United States has seen a noticeable rise in sovereign bond yields from exceptionally low levels. Volatility in financial markets has increased and there has been some widening of credit spreads.

• Domestic economic developments. Some evidence of prior easing were beginning to be felt, and the RBA acknowledged as such today,

The easing in monetary policy over the past 18 months has supported interest-sensitive spending and asset values and further effects can be expected over time. The pace of borrowing has remained relatively subdued, though recently there are signs of increased demand for finance by households.

Recent declines in the Australian dollar have been wholeheartedly accepted by the RBA, as a very positive development, as the higher currency was seen to be hampering the transition in to non-mining sector growth,

The Australian dollar has depreciated by around 10 per cent since early April, although it remains at a high level. It is possible that the exchange rate will depreciate further over time, which would help to foster a rebalancing of growth in the economy.

Also, the RBA noted that unemployment has increased of late and that growth has been somewhat below trend,

In Australia, the recent national accounts confirmed that the economy has been growing a bit below trend over the recent period. This is expected to continue in the near term as the economy adjusts to lower levels of mining investment. The unemployment rate has edged higher over the past year and growth in labour costs has moderated.

• Inflation: Even though the currency had declined, the RBA remains fairly happy to re-affirm the prospects that inflation will remain at the medium-term target levels for the next few years. As the RBA indicated in the prior minutes, inflation was observed to be declining around the world.
• Final paragraph: Here, the RBA noted that further scope for easing remained apparent,

At today's meeting the Board judged that the easier financial conditions now in place will contribute to a strengthening of growth over time, consistent with achieving the inflation target. It decided that the stance of monetary policy remained appropriate for the time being. The Board also judged that the inflation outlook, as currently assessed, may provide some scope for further easing, should that be required to support demand.

Conclusion

In many ways this statement is a continuation of what we saw last month, yet the RBA did not mention the recent regional growth slowdown, as we have seen from China. As the RBA indicated several times, the final paragraph leaves the door wide open for another easing. However, we would estimate that the next easing might take some time this quarter seems about right to us at this point. In Australia, a structurally more conservative consumer is slowing the typical transmission of lower rates to activity at this point, along with a now conservative banking system, and this is what is making the prospect of even further easing tantalisingly close. Further RBA easing will be needed to encourage borrowing, and non-mining growth, from an extremely cautious consumer who is very conservative, not to mention a banking system that is also conservative.