The RBA has come as close to throwing economic growth for 2015 under a bus as possible without signalling a rate cut.
Indeed in my 25 years of RBA watching I cannot remember a more casual approach to below trend growth nor a singular focus on one aspect of the economy as the only bright spot.
Put simply, the RBA minutes from this month’s Melbourne Cup Day board meeting show a central bank that is resting its forecasts on an expectation, which they themselves have questioned recently in the Quarterly Statement on Monetary Policy, that house prices and the wealth effect will ultimately be the saviour of the Australian economy.
But not until 2016.
That is a big bet to take and highlights why Credit Suisse’s behavioural model suggesting the RBA needs to cut rates to 1.5% is so compelling.
Here are the key excerpts from the minutes.
- The RBA was expecting a “pick up in trading partner growth in the September quarter.” Yesterday’s Japanese GDP and China’s slowdown might see them questioning this at the December meeting.
- The fall in global oil prices “would support output growth in energy-importing economies.” Maybe there is some hope for Japan?
- No change to the headwinds in the Australian economy which meant “the forecast for output had not materially changed. GDP growth was still expected to be below trend over 2014/15, before gradually picking up to an above-trend pace towards the end of 2016.”
- The employment market is still soft, “the labour force survey data, which was released by the ABS during the meeting, showed a small rise in the unemployment rate over the previous six months and employment growth somewhat below the pace of population growth…Labour market conditions had remained subdued and it was likely to be some time before unemployment declined consistently.”
- Inflation is not a problem but strangely, “the fall recorded in tradables inflation in the September quarter had been a little surprising, given that it had been increasing in year-ended terms over the previous year, reflecting the depreciation of the exchange rate over the preceding 18 months or so.”
- Australian growth is going to be weak for a while, “GDP growth was still expected to be below trend over 2014/15, before gradually picking up to an above-trend pace towards the end of 2016.”
- The Aussie dollar is still too high, “Despite the recent depreciation of the exchange rate, the Australian dollar remained above most estimates of its fundamental value, particularly given the further declines in key commodity prices over the course of the year to date. As a result, the exchange rate was offering less assistance than would normally be expected in achieving balanced growth in the economy.”
- Rates are on hold, “the current accommodative stance of monetary policy continued to be appropriate to foster sustainable growth in demand and inflation outcomes consistent with the target over the period ahead. Members considered that the most prudent course was likely to be a period of stability in interest rates.”
Notwithstanding the last point if you add it all up you get a central bank that is closer to easing than the market is currently pricing.