No surprises from RBA minutes: Westpac's Bill Evans

No surprises from RBA minutes: Westpac's Bill Evans
No surprises from RBA minutes: Westpac's Bill Evans

GUEST OBSERVER

The minutes of the monetary policy meeting of the Reserve Bank Board for September provided no real surprises. 

However we did see some interesting insights into the evolution in the Bank’s thinking on a number of issues. Of some interest is the differentiation between the services and goods-related sectors of the economy. The minutes note that for both the household and business services sectors, business surveys show conditions were “clearly above average levels” which was consistent with growth in employment and investment in those sectors. In contrast, business surveys only showed conditions in production and distribution of goods sectors to be around average with employment and investment little changed in those sectors. 

This pick up in household expenditure and the depreciation of the Australian dollar were still expected to lead to an eventual pick-up in growth in non-mining investment. 

The commentary around the labour market was a little more mixed than in previous minutes. Forward looking indicators of conditions pointed to the unemployment rate remaining around current levels with some sectors expecting it to fall a little and others pointing to a slight rise. 

The outlook for mining investment appears to have been revised down further with the minutes noting that mining investment would eventually stabilise but at a lower level than the Bank had expected previously. On the other hand surveys indicated that non mining investment was still set to decline further but at a slower pace than implied by earlier surveys. 

Commentary around the housing market has become decidedly more relaxed in recent reports. The minutes note that “measures implemented by APRA had slowed the growth in lending for investment housing”. While the Sydney market was still highlighted as explaining much of the strength in house price inflation it was also pointed out that “housing price inflation had been modest in other parts of the country and negative in some market segments”. 

Overall the weak GDP print (0.2% for the quarter) which was set to be released on the following day was “expected to be weak”. 

International conditions, which focussed around China, were noted as representing “downside risks to the outlook” but it was too early to determine the extent of that revision. 

The minutes indicate that the RBA is less confident about a Fed tightening in September noting that market probability of a hike had fallen substantially in response to the recent volatility in global markets. With the Australian dollar having fallen sharply in recent weeks despite this revised outlook for Fed policy the Bank seems less anxious around the need for Fed action. The commentary around the dollar is just a bland report that the depreciation in the dollar had been in response to significant declines in key commodity prices. It would appear that the Bank is now reasonably comfortable with the degree of adjustment of the AUD. 

Conclusion

Another month has passed by and the Bank is still not giving any encouragement to those folks who are expecting a rate cut by November. In recent weeks market probabilities of that event have reduced from around 80% to around 40%. This pricing is moving more into line with our own views that such a cut is unlikely and indeed rates will remain steady throughout the course of this year and next. Markets have however continued to push out the timing of the first cut with an 80% probability priced by February next year. 

This pricing is much more realistic than the near term prospect that markets had recently expected although our central view remains that rates will be on hold both this year and next year.

Bill Evans is chief economist of Westpac.

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