RBA minutes highlight inflation worries: ANZ's Felicity Emmett

GUEST OBSERVER

Not surprisingly, the focus of the minutes was around the Bank’s downgraded inflation forecasts.

The minutes highlight the Bank’s uncertainty over the inflation outlook, and its concerns about the second-round impact of lower inflation on wages growth.

Don’t read too much into the lack of an explicit easing bias in the minutes. This is normally the case in the press release and minutes following a rate cut. We continue to expect another cut at the August meeting.

INFLATION THE KEY           

With the sharp downgrade to the RBA’s inflation forecasts in the Statement on Monetary Policy (SoMP) the focus in today’s minutes was always going to be on the inflation discussion. The minutes highlight the heightened level of uncertainty around the Bank’s outlook for inflation. As the SoMP suggested, the Bank was clearly disconcerted by the broad-based nature of the weakness in non-tradables inflation.

Interestingly, the minutes highlight the potential for the weakness in inflation to become entrenched, noting that “if inflation was to be persistently lower than previously forecast, it was possible that, in time, this could be reflected in lower wage growth”.

While the minutes note that there is a possibility that labour costs could pick up sooner than expected, they also highlight that heightened job insecurity is likely to be a factor in the global weakness in wage growth. Given the experience of the US, where unemployment has fallen from 10% to 5%, and wage growth has picked up only marginally, it’s difficult to see this factor dissipating any time soon.

The comments on growth were consistent with those in the SoMP, with the RBA noting no material changes to their forecasts for either activity or unemployment, while again noting that the outlook for China “had continued to be a key issue”.

On housing, the minutes reiterated that “supervisory measures were strengthening lending standards and that the potential risks of lowering interest rates therefore were less than they had been a year earlier”. The Bank will be closely watching developments in the housing market; while auction clearance rates have been broadly unchanged at the national level since the rate cut, house prices have been rising solidly through April and May. Moreover, with the recent Financial Stability Review noting heightened competition for investor lending, the RBA and APRA are likely to be watching this closely. 

The RBA’s comments on the currency remained largely unchanged, noting again that “an appreciating exchange rate could complicate [the outlook]”.

OUTLOOK

While there was no explicit bias in the minutes, this is normal practice in the press release and minutes released immediately post a rate cut. In our view, this does not imply that the rate cut was of the ‘one-and-done’ variety. The extent of the downgrade to the inflation forecasts in the SoMP strongly suggest that further easing is likely. That said, the discussion around the possibility of waiting for further data suggests a lack of urgency and counts against the possibility of a back-to-back cut in June. 

We continue to expect further monetary policy easing given the soft inflation outlook, and look for another 25bp cut in the cash rate to 1.5% at the August meeting.

Felicity Emmett co-head of Australian economics, ANZ Research and can be contacted here.