The minutes of the monetary policy meeting of the RBA Board on July 1 showed surprisingly little change from the June meeting minutes. There were three key areas of interest.
1) The Board did repeat the language used in June "Members agreed that it was difficult to judge the extent to which this [low interest rates] would offset the anticipated substantial decline in mining investment and the effect of planned fiscal consolidation".
2) The exchange rate continued to be described as "high by historical standards" and offering less assistance to growth than otherwise might have been the case had it not appreciated by 8% in 2014 when commodity prices had fallen sharply.
And 3) policy was still described as being on hold although there was a change in the language. In June "The Board judged that the current accommodative stance of policy was likely to be appropriate for some time yet"; in July "The most prudent course was likely to be a period of stability of interest rates". Arguably the June quote implies a longer period of stability than July.
Supporting point 3) was the exclusion of a comment: "Those uncertainties were likely to take some time to resolve". That flavour of a long period of inaction has therefore been somewhat watered down by the exclusion of that remark in the July minutes.
At the time of the July Board meeting the market was pricing in 9bps of rate cuts by February 2015 easing to no cuts by July 2015. The minutes chose to overlook that 40% probability of a rate cut by stating that "In Australia market expectations of future cash rates were little changed over the past month and the cash rate was currently expected to remain unchanged for at least the next twelve months".
If the Bank had wanted to highlight the risk of lower rates it could have chosen to point out the almost 50% probability from market pricing of a rate cut by February next year. Over the course of the last two weeks, that market priced probability has risen to around 60%.
The commentary on the domestic economy continued to emphasise the positive developments in the residential construction sector while remaining cautious around the labour market. Dwelling investment was described as: "fastest pace seen in around a decade" while the labour market had "improved a little" and lead indicators were pointing to "only moderate growth". The Bank's liaison indicated that "wage growth was likely to remain subdued for some time".
Liaison also noted that retail conditions were little changed over the May-June period. Since the meeting it was reported that retail sales in May actually contracted by 0.5% therefore probably providing a negative surprise to the Board.
The slowdown in the established housing market has been recognised – "house price inflation slowed" and "loan approvals were little changed over the last six months".
There was a little more optimism around non-mining business investment being described as "picking up gradually".
Conclusion
Despite market pricing now pointing to a rate cut over the next six months there's no evidence in the minutes to indicate that the Board is seriously considering this option. The best way to assess the current policy stance is that the Bank is quite comfortable to await further developments before committing to any policy option. It does not appear to be particularly worried about the emerging weakness in the consumer sector and provides strong emphasis around the sharp lift in residential investment. That view around the consumer may well have been jolted by the release of the May retail sales numbers which showed a 0.5% contraction.
As discussed above, the most curious aspect of these minutes appears to be that the Bank may be preparing to shorten the 'on hold' policy stance. This may be over-reading the subtle changes in the commentary but the decision to exclude "Those uncertainties were likely to take some time to resolve" and "some time yet" in the final sentence may be interpreted in that way.
For our part we remain comfortable with our call that rates will be on hold until the September quarter next year.
Bill Evans
Westpac Chief Economist