RBA's uncertainty on strong consumption creeps in: ANZ Research

RBA's uncertainty on strong consumption creeps in: ANZ Research
RBA's uncertainty on strong consumption creeps in: ANZ Research

GUEST OBSERVER 

The minutes from the RBA’s November Board meeting, at which it left the cash rate at 2%, do not reveal substantial additional detail on the Bank’s outlook.

The meeting predated the release of the strong October labour force numbers, which showed the unemployment rate falling nearly 0.3ppts to 5.9%, the lowest reading since April 2014. These numbers are broadly in line with the RBA’s relatively upbeat observations about labour market developments and help explain (post-script) why the Board chose not to implement a November rate cut, despite markets pricing a 50% probability just prior to the meeting. The Bank noted in the statement after the meeting and in the minutes that “prospects for an improvement in economic conditions had firmed a little over recent months”.

But the Bank also noted that spare capacity in the economy would persist for some time and remains quite uncertain about its consumption forecasts, noting “households' decisions about consumption and saving continued to represent an important source of uncertainty for the forecasts”. The Bank is expecting above-average consumption growth at some point, but we do not share that view. At 55% of the economy, this is a large proportion of expenditure and so any uncertainty could be influential to the Bank’s thinking.

In isolation, the labour force report makes our expectation of a February rate cut more difficult to achieve. But of course the data cannot be read in isolation and the notoriously volatile labour force figures could paint quite a different picture over the next two months. Also, there is a possibility of further rises in lending rates from the banks to offset the regulatory changes that have raised minimum capital requirements. This would force an unwelcome – although probably small – tightening of financial conditions. The RBA’s November Statement on Monetary Policy (SoMP) (released after the Board meeting, but before the strong labour force report) also showed that the RBA lowered its growth and inflation forecasts, and these changes also support our view that the outlook is precarious and lower rates will be necessary in 2016.

Consistent with the post-meeting statement, the minutes said the “inflation outlook may afford some scope for further easing of monetary policy”. While acknowledging that inflation was lower than earlier expected, “inflation was forecast to be consistent with the target over the next one to two years”. The RBA said that while tight competition was limiting the higher price of imports being passed on to final consumer prices, some increase in tradable prices is expected in coming years.

The Bank noted that although there would be further growth in dwelling investment, the pace of house price growth in Sydney and Melbourne “had moderated” and “supervisory measures were helping to contain risks”. On the international front, the slowing in growth in Asia “was likely to be more persistent than expected” and “Australia's trading partners was expected to be slightly below its decade average over the period ahead”. These comments are consistent with the SoMP.

Bottom line, we think the RBA will be looking for a clearer picture before making any decisions. We see a very low likelihood of a move at the next RBA Board meeting on 1 December. This is especially the case with the crucial US central bank policy meeting on 16-17 December, two Australian labour force reports due before February, and the December quarter CPI due on 27 January.

We maintain our view that the RBA will cut rates in the first half of next year. With the stimulus from housing and the lower AUD likely to fade next year, and the inflation outlook providing no impediment to lower rates, we think the cash rate will be cut twice by 25bps, most likely in February and May. 

Cherelle Murphy is co-head of Australian Economics, ANZ Research and can be contacted here.

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