Uncertainties likely to take some time to resolve: RBA

Given the outlook for the economy and the significant degree of monetary stimulus already in place to support economic activity, the RBA board judged that the current accommodative stance of policy was likely to be appropriate for "some time yet," the RBA June Board meeting minutes published today.

At recent meetings, the board had judged that it was prudent to leave the cash rate unchanged. And it appears for some time yet.

"Low interest rates were working to support demand, although it was difficult to judge the extent to which this would offset the expected substantial decline in mining investment and the effect of planned fiscal consolidation.

"Those uncertainties were likely to take some time to resolve," the minutes advise.

"The earlier decline in the exchange rate was assisting in achieving balanced growth in the economy, but less so than previously as a result of its higher levels over the past few months."

The board members noted that the exchange rate remained high by historical standards, particularly given the further decline in commodity prices over the past month. 

It noted a range of indicators of housing construction confirmed that a significant recovery was underway.

"Residential work done picked up strongly in the March quarter," the minutes noted.

"Forward-looking indicators of new dwelling investment were at high levels relative to recent years, although building approvals had declined in recent months.

"In the established housing market, dwelling price growth had eased from the rapid pace seen in 2013 and auction clearance rates in Sydney and Melbourne had declined from the high rates that prevailed during much of 2013."

The minutes noted measures of consumer sentiment had fallen sharply over the past month and were now below their long-run average levels.

However, it was noted that while low-frequency movements in confidence measures had been broadly associated with trends in consumption spending, there was little evidence from the historical record that high-frequency movements carried much predictive content.

In its post-meeting statement earlier this month, the RBA did not explicitly mention the deterioration in consumer confidence but comments around the improvement in business confidence and conditions compared with a year ago were removed.

ANZ believed there was a prospect the minutes could read a little more dovishly than the post-meeting statement.

ANZ concluded that the minutes were "slightly more dovish" than previous recent communications from the Bank.

ANZ suggested the key phrases included “Low interest rates were working to support demand, although it was difficult to judge the extent to which this would offset the expected substantial decline in mining investment and the effect of planned fiscal consolidation. Those uncertainties were likely to take some time to resolve.

ANZ advised this suggested that the Bank will err on the side of maintaining its very expansionary policy setting until it is clear that growth is above trend and spare capacity in the economy is reducing. 

"Our base case is that the Bank starts to remove monetary policy support in Q1 2015 and increases the cash rate by 100bps over the year," ANZ economist Justin Fabo said.

"This would be relatively gradual initial policy tightening by historical standards.

"The risks, however, appear tilted towards a somewhat later start to policy tightening and/or more gradual cash rate hike increases if easy monetary policy is required for longer to support the transition in growth drivers in the economy."