The Reserve Bank of Australia (RBA) doesn’t sound like a central bank itching to cut interest rates again, at least based on the tone conveyed in the minutes of its June monetary policy meeting released today.
Take the wording on recent developments in the domestic economy, as an example.
“Recent data on the domestic economy had generally been positive,” the minutes say.
“GDP growth had picked up in the March quarter to be about half a percentage point stronger than expected. Growth over the year had increased to be a bit above estimates of potential growth, reflecting a stronger expansion in non-mining activity.”
“This was being supported by low interest rates and the depreciation of the exchange rate since 2013,” it adds, suggesting that members believe that past interest rate cuts, along with the weaker currency, were already helping to support the domestic economy.
As it had done in prior meetings, it also acknowledged that “an appreciation of the exchange rate could complicate the adjustment of the economy”, certainly not the language one would expect from a board fretting over the current level of the Aussie.
Much like the cautiously optimistic tone offered towards the domestic economy, so too was the wording on the labour market.
“More timely labour market data indicated that the unemployment rate had remained around 5.75 per cent, but that employment growth appeared to have lost some momentum following very strong growth in late 2015, which was largely as expected,” the RBA said.
“Forward-looking indicators for employment in the near term had been mixed, but overall they were consistent with moderate employment growth in the months ahead.
“While the latest suite of data had confirmed that labour cost pressures remained subdued in the March quarter, a few of the wage measures were slightly more positive.”
On inflation, the other major piece of Australia’s monetary policy jigsaw puzzle, the bank provided no real indication of urgency to spur on additional price pressures, simply noting that both short and long-term measures of inflation expectations from consumers, market economists, union officials and inflation swaps “had remained below average”.
The minutes also presented a relaxed message when it came to the recent uplift in house price, particularly in Sydney and to a lesser degree Melbourne, stating that the extent of future rises “was likely to be affected by the considerable supply of apartments scheduled to come on stream over the next couple of years”.
Along with additional supply, the board also expressed confidence that strengthened lending standards, along with a moderation in housing credit growth, would help to keep a lid on prices.
“There continued to be indications that the effects of supervisory measures had strengthened lending standards, with a number of lenders taking a more cautious attitude to lending in certain segments,” it said, adding “the pace of housing credit growth had edged down further, having peaked towards the end of last year”.
Mirroring the June monetary policy statement, there was also no explicit easing bias forthcoming in the minutes.
“Given these developments, and following the reduction in the cash rate in May, the Board judged that leaving the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and inflation returning to target over time,” they read.
While the absence of a clear easing bias does not mean that RBA can’t or won’t cut rates again — quite simply it doesn’t — the tone expressed towards the economy, employment growth and housing market provides little indication that the economy needs additional stimulus at present.
In reality, had it not been for Australia’s incredibly weak March quarter CPI report, it’s likely that interest rates would not have been cut in May.
Like then, whether the RBA decides to reduce rates again will likely come down to the outlook for inflation, along with near-term threats presented by the UK Brexit vote, Australia’s federal election and the outlook for US interest rates.
Should those events come and go without creating any adverse economic consequences, it suggests that Australia’s June quarter CPI report will be crucial in determining whether the board will cut again, particularly given recent OK labour market data.
Most economists expect that it will, but it’s a lot of faith to place on one single figure.
As suggested by the minutes, outside of the benign inflation outlook, what other reasons are there to cut rates at present?