Steady auction results helped keep RBA rates on hold, but Europe threat leaves door 'ajar' to further cuts says Westpac

Steady February auction clearances rates encouraged the Reserve Bank to keep interest rates on hold, the full minutes of the March Monetary Policy Meeting of the Reserve Bank Board have revealed.

In making its decision to leave rates on hold, the board noted that the “housing market remained soft, with auction clearance rates in February broadly unchanged from late 2011”.

“Housing credit continued to grow at a slower rate than nominal income,” the minutes also say.

The RBA board identified “Europe and its potential flow-on effects to the rest of the world as the major downside risk for Australia”.

The Australian economy remains sensitive to developments in east Asia, but this is now less of a risk than a few months ago.

The minutes also show the RBA has scope to ease policy in response to any adverse scenario.

According to Westpac senior economists Matthew Hassan and Andrew Hanlan, the main difference between the March minutes and the February minutes is a “significant change in the discussion of structural adjustment in the Australian economy”.

Following the release of the minutes, Westpac Economics says it continues to expect a 0.5% reduction in the RBA cash rate with an initial 0.25% move in May/June and a further 0.25% cut in July.

“To our ear, the shift has, if not fully opened the door to a rate move, at least seen it now slightly ajar,” says Hassan and Hanlan.

“Westpac remains less optimistic than the RBA both on the global front –  we anticipate further bouts of volatility emanating from Europe, disappointing momentum in the US and a more pronounced slowdown in China – and domestically where we view the high Australian dollar, structural adjustment and deleveraging as posing more substantial headwinds to growth.

“The change in RBA rhetoric suggests the debate on domestic conditions is becoming more open. Coupled with the quarter-four national accounts and the governor's comments in his March 19 speech it suggests that if further evidence of sub-trend growth emerges domestically, e.g. in labour markets, and the inflation backdrop remains benign the RBA may start considering further policy stimulus measures sooner rather than later.

“In February this was put mainly as an observation – that differences across sectors showed a degree of structural adjustment but that demand growth overall remained firm and the outlook was for a continued trend expansion with inflation around target.

“The March minutes were more equivocal, putting more emphasis on "the uncertainties inherent in assessing the response of the domestic economy to the disparate forces at work, including the very large rise in resources investment and the high exchange rate” and raising the key question of "whether the necessary adjustment was occurring at an overall pace of growth that kept the economy close to trend and inflation close to target."

According to the two economists, the other key points to come out of the minutes are that the Australian banking system remains relatively strong and the household sector continues to show a more cautious approach towards its finances.

“Aggregate measures of household financial stress remains low, though mortgage arrears rates remain somewhat higher than a few years ago,” Hassan and Hanlan note.

“For the business sector, conditions continued to vary significantly, with the divergent experiences helping to explain why banks' non-performing business loans and business failure rates were somewhat higher than average.

“Overall, though, the business sector was in a better financial position than several years ago, having deleveraged considerably and improved its liquidity position. The commercial property market, traditionally a source of vulnerability for banks, had continued to improve after the recent downturn, though construction activity remains muted and financing activity weak,” they say.