Minutes confirm RBA’s weak easing bias

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Prior to the RBA’s July meeting, my hunch was that the RBA would drop back to a weak easing bias. I still think that’s where they are, despite the fact that the minutes suggest they did not even discuss an easing of monetary policy.

with a material easing in monetary policy having occurred over the preceding six months or so, and with recent signs that the domestic economy had a little more momentum than had earlier been indicated, members saw no need for any further adjustment to the cash rate at this meeting.

This is lifted from the final paragraph of the RBA’s minutes to the July Board meeting – released yesterday.

While retaining a slight easing bias, on account of the global backdrop, the board appears to have put more weight on the better than expected Q1 GDP result and the recent firming up of retail sales than i anticipated. Consistent with the basically steady unemployment rate, they now judge that growth has been around trend.

They expressed some concern about data quality, but were generally a little more upbeat on the current assessment than i expected.

The RBA targets their inflation forecast, so i don’t think that the Q2 CPI number is all that important for figuring out what happens to monetary policy in August. They cannot do much about inflation over the next six to twelve months: so if they think that the recent firming of demand is likely to be sustained (so that they revise up their growth assumptions in the Q3 MPS) it seems most unlikely that the RBA will be cutting in August.

A low enough CPI result would do the trick – certainly another 0.3%q/q would get a cut – but I think that the demand data is much more important.

We have June building approvals and retail sales before the RBA’s 7 August decision: both interest rate sensitive sectors that will give us some information on the impact of the 50bps cut on 8 May and the 25bps encore on 5 June.

Right now, I’m guessing that the trend improvement in both series will be sustained, and that CPI will not be sufficiently low for the RBA to move rates.

So long as Europe holds together, the next ‘live’ window seems likely to be the Nov meeting – by which time we may have seen some evidence that the unemployment rate has actually moved out of the 5% to 5.5% range it’s been tracing since mid 2010.

If I’m right about the short-term outlook, the ‘wrongest’ bit of the short end is the 45bps of cuts priced in until October. That should be ~11bps (25% chance of -25bps, 5% chance of -50bps, and ~2% chance of a 100bps cut).


  1. It is hard to see how any recent firming in demand and asset prices will be sustained if, as appears likely, the US has entered recession. Growing recognition of a US recession over the next few months will hit equity markets hard, which in turn will flatten domestic demand. It might not happen by the October meeting, but it should happen eventually. Has there been any occasion when the RBA has not cut after the US has entered a recession? In other words, I can’t see we’re at the end of the cutting cycle.

    1. i agree with you – i think the cash rate keeps falling.

      but that’s going to require more evidence that demand is softening. right now, things look about trend, and the government has chosen to run a see-saw fiscal policy. A big push in H2’12, and a large sucking sound in H1’13. It would be a miracle if demand didn’t firm a little in Q3 given the cash that went in at the end of Q2, the tax cut (end of Qld levy) and the rate cuts in May and June.

  2. Hey Ricardo

    Good post again! Agree with your assesment but I think demand data will be strong enough to turn this weak easing to neutral. Also I’m very surprised this whole employment / population story has got so much air play. From what I can tell the story about employment didnt change that much i.e. it was still the weakest since the 90s. Plus as you have always pointed out the bank places more weight on the unemployment rate. Id also be very surprised if it caught treasury and the bank by surprise. So whats the fuss i really dont understand?

    1. Gosh, i agree – the job headcount number is pretty close to irrelevant. The debate has been a good test of who knows their eggs and who gets fed BS from interested parties (or feeds it!)

      If we want to talks ‘jobs’ we need an establishment survey.

      I am not dogmatic about the m/t outlook – right now i know my limitations re forecasting. It is possible that the cheap capital flowing into Aus allows us to perform – but that is not my base case.

      1. So why do you think treasury keep leaking stuff to pete martin that fuels this story. Seems very political to me

        1. My guess is that they are sensitive to the criticism that the economy is doing badly. Also, ABS error makes some smoke to defend Swan from his ridiculous jobs forecast/prediction.

          But surely no one serious thinks the Job series is usable?

  3. Can the rate curve remain permanently inverted despite all this (which I agree with)?

    I find it incredibly odd that the inversion out to 2 yrs remains so strong.

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