RBA meeting minutes suggest only mild easing bias; August rate cut a close call

The Reserve Bank of Australia released its June meeting minutes that provided the same message that the bank delivered in its post-meeting statement. It implied a slight easing bias. Indeed, the strong economic activity data, especially the first quarter GDP report, has countered certain worries that were raised by the subdued inflation report in the first quarter.

The minutes showed that there were significant talks regarding the above-expected GDP data of first quarter.  According to the minutes, strength was seen in government demand, consumer spending and housing construction. It stated that the recent strength in building permits suggested continuing growth. It played down the weakness seen in the CAPEX survey.

The Board now appears to be less negative regarding the wages outlook as compared to the May meeting despite repeating that inflation is likely to remain low for some time. This implies that the central bank is closely observing labor costs and how it might contribute towards higher inflation over time, said St George Economics in a research report.

The Board’s talks regarding the outlook of international wage was more optimistic. The comments of the Board altered from May’s statement of “across most advanced countries, wage growth had thus far remained subdued” to June’s minutes of “tightening of labour market conditions in the United States and Japan had led to some increase in wage pressures and that unit labour cost growth had been noticeably higher than its 20-year average in both countries”.

Meanwhile, the talks about domestic wages were also quite optimistic. The Reserve Bank of Australia played down the slight decline in the first quarter’s wage price index and emphasized the stability in measures of the WPI and the rebound in the GDP measure of wages.

On the housing front, the meeting minutes showed that the central bank is quite relaxed regarding the outlook. This implies that the strength seen recently is unlikely to come in the way of additional easing, said ANZ in a research report.

According to the meeting minutes, the deviation in the housing price and credit growth trends was not anticipated to continue for a longer period of time and that “although rates being paid by most borrowers had moved lower as a result of the reduction in the cash rate, banks’ serviceability requirement for borrowers had not changed”.

The second quarter CPI report of Australia is seen as an important data for the near-term outlook for rates, noted ANZ. The RBA has projected underlying inflation to accelerate about 0.5 percent. Additional miss on the downside is expected to be sufficient to convince the central bank that the first quarter print was more of a signal than noise, and that the subdued trend remains, according to ANZ.

For the RBA’s monetary policy deliberations, the exchange rate would be a vital input too. The central bank continues to state that that the AUD’s appreciation might make it difficult for the economy to adjust to the lower terms of trade. The EBA is unlikely to be impressed with the exchange rate’s recent rally as it occurred along with a fairly flat iron ore price.

The continuing lack of a clear easing bias in the central bank’s comments signifies that a rate cut in August is a close call. The RBA is likely to further lower the rates given the size of downward revision to the Bank’s inflation outlook and the fact that the mid-point inflation forecast continues to be lower than the target range of 2 percent-3 percent for the entire forecast period, added ANZ.