RBA's July board meeting confirms the cash rate isn't changing: Matthew Hassan

RBA's July board meeting confirms the cash rate isn't changing: Matthew Hassan
RBA's July board meeting confirms the cash rate isn't changing: Matthew Hassan

EXPERT OBSERVER

The minutes of the Reserve Bank Board’s July monetary policy meeting provide some significant additional colour around the Bank’s current thinking.

The main points of interest are: 1) a slightly more tentative tone around the outlook; 2) the reinstated line that the next cash rate move “would more likely be an increase than a decrease” but with a clearer qualification that this would not be any time soon; 3) expanded comments on the rise in bank funding costs, albeit without any strong conclusions; and 4) additional commentary about a ‘special paper’ prepared for the meeting on Australian household debt.

As to be expected, the main discussion was as per the Governor’s post-meeting decision statement: a little less positive on the global front, acknowledging uncertainty around trade policy abroad and rising short term wholesale interest rates locally, but assessing the Australian data flow as in line with the Bank’s above trend growth view, with a slightly firmer outlook for labour markets but key uncertainties still hanging on the outlook for the consumer.
 
However, there were some notable shifts in the closing paragraphs of the ‘Considerations for Monetary Policy’ section, which sets out the decision rationale and framework for policy decisions going forward.
 
Usually this just reprises the closing paragraphs from the Governor’s decision statement.
 
However, the July minutes provide quite a bit more colour.
 
The outlook comes across as a little more tentative – whereas the July decision statement and June minutes carried the simple line that: “Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual”, the July minutes couched this as something “Members continued to view the strengthening economy as likely to deliver”.
 
The commentary provides a clearer framework for future policy as well.
 
Back in April-May the minutes included a slightly surprising line that: “In the current circumstances, members agreed that it was more likely that the next move in the cash rate would be up, rather than down.” This line was dropped in the June minutes but reinstated in the July minutes.
 
However, it was given an important qualifier that “since progress … was likely to be gradual, [members] also agreed there was no strong case for a near-term adjustment in monetary policy” and that “it would be appropriate to hold the cash rate steady … while this progress unfolds”.
 
This brings the minutes into line with recent commentary from the RBA Governor, and in particular a speech on June 13 in which he noted that “the environment in which interest rates are increasing is also likely to be one in which people's incomes are growing more quickly than they are now”.
 
The bottom line is that official rates are not moving up any time soon.
 
One area of keen interest going into the minutes was how they would handle an expanded discussion of the rise in wholesale interest rates.
 
The Governor’s decision statement had acknowledged that gains in recent months were due to more than just developments in the US but stopped short of describing the ‘other factors’ at work.
 
The minutes go a little further, members noting the tendency for pressures to rise at the end of the quarter and that major bank funding costs had risen “a little over 2018”.
 
While the Board clearly remains uncertain about how persistent these pressures will be, the phrasing and the consistent note that “the average mortgage interest rate on outstanding loans had been declining for some time” given more prominence in the minutes and Governor’s statements in recent months suggests the Bank is not overly concerned about the current situation.
 
We look forward to a fuller assessment in the RBA’s August Statement on Monetary Policy.
 
The July minutes included an extended discussion on Australian household debt levels, with a ‘special paper’ prepared for the meeting.
 
Key points were fairly familiar although some comments were notable, in particular that “members recognised that a material share of household debt is held by lower-income households, which generally have higher debt relative to their income”.
 
The same group however were seen as likely to have ‘asymmetric’ responses to interest rate moves –sensitive to increases but less likely to borrow more when rates fall.
 
Conclusion
 
There were many other points of interest in the remainder of the minutes, which were the longest in word count terms since the RBA began publishing full meeting minutes in 2006.
 
Many of these were more optimistic than the comments we have singled out – household labour incomes and labour market vacancy rates for example were noted as positives domestically, as were the contributions from public sector activity, infrastructure investment, non-mining business investment more generally, a rise in the terms of trade and evidence of rising wage pressures in major economies abroad.
 
Overall though the additional colour from the July meeting minutes again underscores that policy is firmly on hold. We remain of the view that the RBA will leave the cash rate unchanged throughout 2018 and 2019.
 
Matthew Hassan is a Senior Economist at Westpac.
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