Uncertainty reigns in August RBA board minutes: ANZ

GUEST OBSERVERS

The RBA minutes suggest a higher degree of uncertainty around the Bank’s outlook, with board members concerned about the labour market, potential negative feedback from the housing market into the CPI, and the effect of easy international monetary policy on the exchange rate.

While we still expect the RBA to keep the cash rate on hold at 1.5 percent as it assess the impact of the May and August rate cuts, we continue to see the risks as tilted firmly to the downside.

DETAILS

The RBA remains more than usually uncertain about the labour market. “Members noted that there continued to be considerably uncertainty about momentum in the domestic labour market and the extent to which domestic inflationary pressures would rise over the next few years.”

These concerns relate to the degree of slack currently in the labour market, with measures of underemployment suggesting that overall labour underutilisation remains high. Moreover, the Bank is concerned that while the expansion of LNG export capacity will make a significant contribution to growth over the coming years, its low labour intensity will not see a similar boost to employment.

The Board is concerned about a negative feedback loop from housing into inflation. The minutes note that the risk of housing oversupply was “important for the inflation outlook because housing costs make up a significant share of the CPI basket”.

 

The pressure on housing costs as measured by the CPI is likely to come through in both rents, which are barely growing, as well as new house purchase costs. Together, rents and new house prices make up 16 percent of the inflation basket and are the two largest components of the CPI.

The impact of international monetary policy on the exchange rate continues to be a bugbear. The Board noted that “changes to expectations about central banks’ policies continues to have an important influence on global exchange rate developments”, after acknowledging that a rate risk in the US was not priced in until late 2017 and further easing was likely in Europe and the UK.

 

They reiterated the comment that “an appreciating exchange rate could complicate the necessary economic adjustments”.

OUTLOOK

While the minutes did not include any explicit forward guidance, we think that the RBA retains a strong easing bias. With inflation set to remain below or at the bottom of the Bank’s 2-3 percent target band for the entire forecast period, we expect that the easing bias is quite strong, particularly when banks passed on only half the August rate cut to variable home loan customers.

Our central case is that the cash rate will remain unchanged at 1.5 percent, but we see a clear risk of further easing given the low inflation outlook, where there is a lack of drivers for a meaningful pickup in prices.

We think that the RBA will want to assess the impact of the May and August cuts on the labour market and housing market, while inflation data come into play when the Q3 CPI is published on 26 October. The exchange rate also will continue to be an important input into monetary policy deliberations given that it appreciated after the August rate cut and is near the high reached in April.