Interesting detail in June RBA minutes: Matthew Hassan

The minutes to the RBA’s June monetary policy meeting mainly reiterated the key points from the Governor’s decision statement and the additional ‘message’ from previous minutes – that the Bank’s main focus was on developments in labour and housing markets.

That said, there were some notable details: an intriguing new paragraph on financial stability in the ‘Considerations for Monetary Policy’ section; a slightly more bullish/hawkish discussion of international conditions; and several useful snippets from the detailed discussion including those gleaned from the Bank’s liaison programme.

As per the Governor’s decision statement, the slower growth picture for the March quarter was acknowledged but attributed to “quarter to quarter variation” with the Bank’s positive medium term outlook for growth to rise to a little above 3 percent reaffirmed.

The labour market commentary in the minutes was perhaps a little more positive than in the Governor’s statement which explicitly described indicators as “mixed”. The minutes do not use this particular term although the rest of the discussion is the same. Note that the RBA meeting took place well before the surprisingly strong May labour force report released last Thursday.

The more constructive view around business investment that appeared in the decision statement was largely repeated, the detailed discussion downplaying the disappointing forward view from the Capex survey, citing its limited coverage and more positive tone from approvals, liaison feedback and business surveys.

On housing, the decision statement repeated the Governor’s statement comment that price pressures were starting to ease in markets that had seen brisk price rises. The minutes also note that housing credit growth had been steady with some slowing in growth in investor housing credit. However, “APRA’s recent prudential supervision measures … were yet to have their full effect”.

As in both April and May, the minutes concluded with the line that: “the Board continued to judge that developments in the labour and housing markets warranted careful monitoring”. Note that this line does not appear in the Governor’s decision statement, perhaps to avoid the appearance of giving some sort of policy guidance, e.g. these areas warrant monitoring but are not in a situation where they would draw an immediate policy response.

Turning to the ‘notable details’, the new paragraph on financial stability added to the ‘considerations’ section notes this aspect of the RBA’s role sits within its wider medium term inflation targeting framework, the effect of monetary policy decisions within this framework and the role of prudential supervision. It stresses the importance of cooperation and coordination across agencies facilitated by the Council of Financial Regulators.

While there are no ‘overt’ messages in the discussion, its inclusion is intriguing. Is it, for example, implying that a coordinated approach may also apply if the RBA were to consider additional rate cuts? Alternatively, is it simply restating the clear message the Bank has already given about the importance of financial stability concerns for policy and a broad endorsement of the current status quo?

The June meeting minutes sounded less wary on international conditions and more alert to a potential lift in inflation. Whereas previous minutes regularly noted risks to China around residential property markets and rising leverage in the Chinese economy, this line did not feature in June which ran with simpler observations including that the “recovery in residential construction had continued despite the Chinese authorities having again tightened policy measures aimed at reducing speculative activity”. 

More pointedly, the minutes also note that “globally, headline inflation had picked up” and that while this largely reflects higher oil prices with core inflation still low, “unemployment rates in many major advanced economies had been around or below levels that could be associated with a build-up in wage pressures”, with some signs that both wages growth (increasing in the US and Japan) and growth in unit labour costs (above average in the US, Japan and Germany) may be starting to respond.

The general theme is not new – last month’s minutes included the line that “core inflation was expected to rise gradually in the major advanced economies as spare capacity in labour markets declined further” – but the tone seems more hawkish.

Other useful snippets in the detailed discussion mainly come via the Bank’s liaison programme which included: “retail trading conditions had remained challenging”; “isolated reports of localised and skills-specific labour shortages feeding into higher wages”; and “identified a range of commercial property projects that are under consideration for the year ahead” that have yet to appear in the approvals data.

Conclusion

Monetary policy clearly remains firmly on hold as the Board assesses developments in housing and labour markets. The strong May labour force report released the week after the Bank’s June meeting would have eased some of its concerns on this front, although weak wages growth is likely still a factor (indeed this is one aspect of current conditions that could have received more discussion in the minutes which simply noted the link to consumer incomes and spending). It may also be becoming more comfortable around housing market risks as well although the situation here is clearly still evolving.

Overall there appears to be little shifting the Bank away from its positive medium term view on growth. Westpac’s more downbeat forecast for 2018 – based on a more significant drag from housing construction and falling commodity prices – will take time to become apparent and, in our view, will not be sufficient to draw an RBA interest rate response, particularly given its concerns about potential financial stability risks. As such we remain comfortable with our view that rates will remain on hold for the remainder of 2017 and 2018.

Matthew Hassan is senior economist with Westpac.