The minutes of the Reserve Bank of Australia’s (RBA) July monetary policy meeting were released today, conveying an upbeat assessment on the current state of the global and Australian economies.
On first glance the tone of the minutes appears to be a little more confident than the monetary policy statement released at the conclusion of the meeting, especially when it came to the bank’s assessment on the Australian economy and labour market, two areas in the statement that were widely perceived to be less hawkish than what many had been looking for.
Here’s what it said in relation to the current state of the domestic economy (our emphasis in bold):
Domestically, the data available for the June quarter had generally been positive, following the slower growth recorded for the March quarter. Although recent indicators suggested that consumption growth had increased in the June quarter, members noted that there were still risks to consumption growth should household income growth remain subdued, particularly given the high levels of household debt. Against this background, the recent improvement in labour market data had been a positive development. Members noted that the strength of recent labour market data had removed some of the downside risk in the Bank’s forecast of wage growth.
Business surveys had continued to suggest that business conditions were above average. Recent state budgets and data on non-residential construction suggested that the contribution to growth from infrastructure investment would rise. The pipeline of residential construction was expected to support dwelling investment over the forecast period. The economic outlook continued to be supported by the low level of interest rates.
In the post meeting statement, most of the attention was on the bank’s omission of the view that economic growth would increase “gradually over the next couple of years to a little above 3%”, instead noting that it would “strengthen gradually”.
Many saw that as a sign that the bank may have been preparing markets for a downgrade of its GDP growth forecasts in its upcoming August Statement on Monetary Policy.
The minutes, in contrast, seem to cast doubt as to whether that will eventuate.
Another area that the RBA appeared a little more upbeat was towards Australian labour market conditions, something that it described in the July policy statement as being “mixed”.
Here’s what was discussed during the meeting (again, out emphasis in bold):
Recent data had provided further confirmation that labour market conditions had improved since late 2016, consistent with signals from forward-looking indicators in previous months. Employment growth had been strong in May for the third consecutive month. Members noted that growth in the preceding few months had been driven entirely by full-time employment and that total hours worked had trended higher as a result. The unemployment rate had declined by 0.3 percentage points over the previous two months, to be at its lowest rate since early 2013.
Forward-looking indicators of labour demand, such as job advertisements and business hiring intentions, had remained positive and generally consistent with the patterns of employment across states and industries.
Again, a little more positive than simply being “mixed” as communicated in the abbreviated statement, even with the admission that the underemployment rate had “remained elevated” with wage pressures remained “subdued”.
With the RBA admitting that recent strength in labour market had removed some of the downside risks for forecast of wage growth, it suggests that it is becoming more confident that inflationary pressures, which are heavily influenced by wage growth, will continue to edge higher.
The board also discussed at length the “new” neutral level for Australia’s cash rate — where monetary policy neither adds or subtracts from aggregate demand — noting that it was now around 3.5%, some 2 percentage points above where it currently sits.
Here’s the key paragraph from the minutes:
Members noted that some of this decline could be attributed to lower potential output growth, but the increase in risk aversion around the time of the global financial crisis was likely to have been a more important factor. All estimates of the neutral real interest rate for Australia suggested that monetary policy had been clearly expansionary for the preceding five years or so. It was also noted that a reduction in risk aversion and/or an increase in the potential growth rate could see the neutral real interest rate rise again.
While there’s little debate that neutral policy settings are now lower than what they were in the past, nor that they’ve been expansionary for several years, the view that a reduction in risk aversion “could see the neutral real interest rate rise again” implies that interest rates at current levels may be more stimulatory than previously thought, given global risk aversion appears to be dissipating.
The minutes said that “there is significant uncertainty around this estimate”, although this now needs to be a consideration on the outlook for interest rates should the global economy and financial markets continue to firm.
Whether that indicates that a rate hike may be closer than many currently think remains debatable, but given the upbeat assessment towards the domestic economy and labour market conditions, along with a continued upbeat view on global economic conditions in which it said that growth in some economies “had been a little stronger than expected”, it suggests the board is becoming increasingly confident on the outlook for GDP growth, inflationary pressures and labour market conditions.
Australian dollar traders certainly think that’s the case, pushing the AUD/USD to as high as .7876 in the immediate aftermath of the release, leaving it sitting at the highest level since June 2015.
Australian 3-year government bond futures have also been smacked (yields higher), falling 6 ticks to 97.94.
Cash rate futures have also sold off, implying a greater probability that RBA rate hikes could be on the card sooner than what many previously thought.