The RBA Is Suddenly More Downbeat About Australia's Economic Outlook

Reserve Bank Governor Glenn Stevens.

The Reserve Bank has just released the minutes for this month’s board meeting which read, and have been taken by Aussie dollar traders, as far more dovish than expected.

While the RBA has been balanced over many months about the pros and cons of the outlook, this month’s minutes are decidedly downbeat with a clear increase in uncertainty around the RBA’s central tenet recently that the economy has been steadily improving.

The RBA’s change in tone can be seen here.

Low interest rates were working to support demand, although it was difficult to judge the extent to which this would offset the expected substantial decline in mining investment and the effect of planned fiscal consolidation. Those uncertainties were likely to take some time to resolve.

This is an unequivocal shift in thinking and statements from the RBA and signals that while rates may be on hold for some time, the RBA’s bias has shifted from neutral to one favouring easing.

Other key takeaways include:

The employment picture in Australia is mixed at best.

Forward-looking indicators had improved over the past year but remained at low levels, consistent with relatively moderate growth in employment over coming months.

Retail sales and the domestic economy are generally under pressure from the crash in consumer confidence but the RBA is thinking there should be a snap back in sentiment which will mean sales end up okay in the months ahead.

Household consumption spending had continued to increase, with growth in the volume of retail sales in the March quarter around the same strong pace as in the December quarter. Following strong growth in January, growth of the nominal value of sales had slowed over the three months to April, and the Bank’s retail liaison suggested that growth had moderated further in May.

However, it was noted that while low-frequency movements in confidence measures had been broadly associated with trends in consumption spending, there was little evidence from the historical record that high-frequency movements carried much predictive content.

The increase in uncertainty surrounding consumers and the domestic economy means business is holding back investment.

In the Bank’s liaison, non-mining firms continued to report a reluctance to commit to significant new investment projects until they saw a sustained improvement in demand conditions.

The up-tick in first quarter 2014 growth as measured by GDP won’t last.

The expectation of substantial falls in mining investment, below-average growth of public demand and non-mining investment remaining subdued for a time implied that the pace of growth was likely to be a little below trend over the rest of this year and into the next, before gradually increasing.

The budget is okay in the next year or two but then takes out more money from the economy than they expected.

Members observed that the change in the budget position over the next couple of years was forecast to proceed at a similar rate to earlier episodes of fiscal consolidation. Beyond that horizon, the budget implied a more substantial fiscal consolidation than had earlier been projected.

Of course the RBA’s now usual mantra that the Aussie dollar is overvalued by historical standards remains intact.

All up this is is a very clear shift by the RBA and one that suggests the hurdle for a rate cut has lowered and if consumer confidence doesn’t bounce back or if retail sales are impacted materially over the months ahead they will become more dovish. But while their bias has changed for the moment, rates seem on hold “for some time yet.”

The RBA statement is here.

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