The minutes of the Reserve Bank of Australia’s (RBA) December monetary policy meeting were released earlier today to little fanfare.
On December 20, it was always going to struggle to drum up interest.
A meaningless release following a meaningless meeting where the RBA did nothing on rates, that’s more than likely the view shared by many of those still working in the markets when they looked at the economic calendar today.
However, as usual, that wasn’t the case on this occasion.
Buried away in the section entitled “considerations for monetary policy” there was one paragraph that, on the surface, indicated that the bar for another interest rate cut is moving higher.
Here it is (our emphasis in bold).
In considering the stance of monetary policy, members discussed the policy decisions made throughout the easing phase since late 2011, during which the cash rate had been lowered in aggregate by 3.25 percentage points. The lower rates had helped support the economy in the transition following the mining investment boom and, more recently, had been in response to lower-than-expected inflation. Members discussed the effect of lower interest rates on asset prices and the decisions by households to borrow, particularly given the already high levels of household debt. Over recent years the Board had sought to balance the benefits of lower interest rates in supporting growth and achieving the inflation target with the potential risks to household balance sheets. Members recognised that this balance would need to be kept under review.
Having cut rates by 325 basis points since late 2011 in order to boost economic activity and keep inflation within its 2-3% target, the board just said that it is now paying closer attention to the build-up in household debt brought forward by the current easing cycle, indicating that financial risks will now be a more influential factor when determining interest rate movements.
It certainly caught our eye, belatedly, and it appears that others saw it too.
Gareth Aird, senior economist at the Commonwealth Bank, was one who certainly spotted this insight into the mindset of the RBA board under Philip Lowe, suggesting that it contained the “thumb print” of the new RBA governor.
“These are indications that the RBA, under governor Lowe, is placing a little more emphasis in policy settings on asset prices and financial stability than it did under former Governor Stevens,” he said in a note following the release of the minutes.
“Lowe looks more willing to tolerate inflation outside of the target band if it reduces the risk of financial imbalances and the further build of up debt in the household sector.
“To us, Lowe’s comments are a strong hint that the Governor doesn’t want to take the cash rate lower,” he added.
Bill Evans, Westpac’s well-respected chief economist, agrees with the sentiment expressed by Aird, suggesting that the paragraph signals “that the hurdle to even lower rates which would be aimed at boosting demand is very high”.
“With housing markets in the south east remaining vibrant the risks of further cutting rates appear to be quite concerning for the Board,” he said.
Both the Commonwealth Bank and Westpac have the RBA on hold for the entirety of next year.
Now, along with quarterly CPI reports from the ABS, upcoming housing data — be it credit, price growth, auction clearance rates or others — now appears to have taken on significantly greater importance.