Notes from the RBA's monthly meeting show the board wasn't contemplating rate cuts

Since Westpac increased its home loan mortgage rate by 0.20% last week the cabal of analysts expecting the RBA to be cutting has grown. Some believe the RBA will cut as soon as the Melbourne Cup meeting in two weeks’ time.

Many of the banks and economists calling for a cut see Westpac’s move as a tightening in monetary conditions in an economy that is in need of additional monetary support.

But in the minutes from its board meeting, there is little evidence the RBA saw any need to cut. The lack of identifiable risks appears to mark a high hurdle for an imminent cut

The minutes reflect a board which appears to have discounted the weakness in the second quarter 2015 GDP, and focussed on the upside in the economic transition.

The board said the weakness in GDP was “as expected” and reflected “temporary, weather-related disruptions to resource exports as well as the ongoing decline in mining investment.”

The board then reflected an expectation that:

Overall growth was expected to have strengthened in the September quarter, with indications of growth in resource exports and dwelling investment. Members also observed that employment growth had strengthened despite GDP growth over the year having been at the lower end of the forecast range of a year earlier.

Consumption growth was “below average for the past year but still better than 2013,” the board said. This was even though household incomes were rising “a little less than consumption over the past year.”

Driving that is the fall in the savings rate, but the board suggested suggested consumption growth would continue via wealth effects and the fact “surveys of households’ perceptions of their personal financial situation compared with a year earlier remained above average.”

So people are feeling a bit more upbeat, which provides a good environment for spending.

Of course the board highlighted the fall in mining investment which was now just 5% of GDP, down from a peak in 8% and that profits at mining companies had fallen along with the price in the past year. But, it also noted some offset to the fall in mining investment via the production phase kicking off in LNG which was likely to see export volumes “increase substantially.” (And to underscore the point, the first shipment of LNG from the mammoth GLNG product in Queensland left last week.)

On the crucial economic transition, the RBA highlighted that the Australian dollar’s fall was doing its job to aid growth. This, they said, “had led to an increase in exports of services, including tourism, as well as a noticeable decline in imports of services.” The board also said non-mining investment had picked up and that “measures of business conditions had increased to be further above their long-run averages, notably in the household and business services sectors.”

That’s all pretty sanguine and the RBA also noted that rate cuts earlier this year were still working through the economy. “Reductions in the cash rate earlier in the year continued to provide support to aggregate demand,” the minutes said. The board said that employment is, with the Aussie dollar, a real bright spot in the economy. The economy is just 5,100 people shy of an all time record number of employed Australians. That’s remarkable given where most people would have judged the economy to be sitting six or 12 months ago.

That’s something the minutes reflect as well saying the labour market “had strengthened further over recent months and were somewhat better than had been expected earlier in the year.”

So no signs here of a rate cut being near, and no real signs of any clear and present dangers to the Australian economy that would prompt a cut.

Concerns over China and the Asian region were aired in the minutes but the board noted that Europe and the US continue to recover and that “Global financial conditions remained very accommodative and low oil prices were expected to continue to provide a measure of support to growth in Australia’s major trading partners.”

The key here is that the board seems fairly comfortable with where the economy is at the moment but as usual said, “Information about economic and financial developments, both domestically and abroad, would continue to inform the Board’s assessment of the outlook and whether the current stance of policy remained appropriate to foster sustainable growth and inflation consistent with the target.”

That is if growth here or in our trading partners falters they’ll cut. Otherwise the status quo remains.

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