- In the minutes of May monetary policy meeting, the RBA said that it was “more likely that the next move in the cash rate would be up, rather than down”. It also said that stability in the cash rate should be seen as “a source of stability and confidence”.
- One month later, it removed those lines from its June monetary policy minutes.
Capital Economics says that this “seems to be another example of miscommunication, rather than the RBA sending a strong signal that it’s much less keen to raise interest rates”.
The Reserve Bank of Australia (RBA) remains optimistic that stronger economic growth will lead to a gradual decline in unemployment and pick-up in wage and inflationary pressures.
However, breaking with the view communicated in recent months, it no longer says it is “more likely that the next move in the cash rate would be up, rather than down”.
Nor does it believe that stability in the cash rate should be seen as “a source of stability and confidence”.
They’re the two main talking points to come from the minutes of its June monetary policy, casting doubt on whether the next move in official interest rates will he higher after all.
“The low level of interest rates was continuing to support the Australian economy. Further progress in the period ahead in reducing unemployment and returning inflation to the target was therefore expected, although this progress was likely to be gradual,” the board minutes read.
“In the current circumstances and taking account of the available information, the Board judged that holding the stance of monetary policy unchanged would be consistent with sustainable growth in the economy and achieving the inflation target over time.”
This is a notable change in tact, especially given the RBA scrutinises the wording of every policy statement carefully given it knows markets are watching every word it says as closely as a hawk.
However, does it mean the RBA is growing less confident that the next move in the cash rate is likely to be higher?
Only last week, RBA governor Philip Lowe said that it “is likely that the next move in interest rates will be up, not down”, adding the caveat that this was conditional on the Australian economy “moving in the right direction”.
Hinting that its little less sure about the economic outlook, its language towards the labour market and wage pressures was noticeably cautious in June.
“Looking through the monthly volatility in the labour force data, members observed that employment growth had slowed from a very fast pace in 2017 to something closer to the rate of growth in the working-age population,” the minutes said.
“The unemployment rate had been broadly steady at around 5.5% since mid 2017, suggesting that spare capacity remained in the labour market.
“The ratio of job vacancies to the number of unemployed workers had remained well below levels seen a decade earlier, which also signalled spare capacity in the labour market.”
Along with those dovish comments, it added that “wages had continued to grow at a low and stable rate”.
Again, another word that does not exactly ooze confidence that wage pressures are building.
However, it tempered those remarks by acknowledging that “there had been some evidence of increased wage pressures in some areas of the economy”, adding that a larger number of firms had reported “greater difficulty in hiring workers with the requisite skills”.
It also expressed confidence that the 3.5% increase in Australia’s minimum wage rate from July 1 will help to “boost wage outcomes in the September quarter”.
While seemingly a positive, there was a similar-sized 3.3% increase in the minimum wage rate in July last year. However, despite that increase, it did not lead to a pick-up in wages to anywhere near the level expected.
Indeed, in the year to March, private sector wages grew by less than 2%.
It also suggests that without mandated increases, wage pressures may have eased even further.
Combined with prior wage outcomes, as well as elevated labour market slack and evidence abroad, it’s little wonder the RBA thinks any lift in wages will be gradual.
Given the risks, it could well be glacial rather than gradual.
Despite the uncertainties that exist in relation to wage pressures, the RBA stuck with the view that lower unemployment will lead to a gradual lift in underlying inflation towards the centre of its 2-3% target.
However, until it’s confident that is occurring, official interest rates will be left on hold.
While the board will likely be heartened by recent GDP and labour market data, revealing a faster-than-expected pickup in economic growth in the March quarter and fall in unemployment in May, there’s still a large degree of uncertainty as to whether those trends will continue in the months ahead.
If they don’t continue, leading to little progress in lower unemployment and a slowdown in economic growth, as the minutes suggest, there’s a risk that rates could actually be cut further.
“It appears… the RBA is less convinced that the next change in rates will be a hike,” says Paul Dales, Chief Australia and New Zealand Economist at Capital Economics.
On the removal of the lines regarding the outlook for the cash rate and stability in rates being a source of confidence, Dales says that this “seems to be another example of miscommunication, rather than the RBA sending a strong signal that it’s much less keen to raise interest rates”.
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