RBA emphasises easing bias and highlights focus on the labour market in the period ahead.

The minutes of the May RBA Board meeting confirm that the Board holds a clear easing bias.

This is spelt out when the technical assumption that the cash rate followed the path implied by market pricing is used in the forecast.

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As the minutes note “financial market pricing implied that the cash rate was expected to be lowered by 25bps within the next three months and again by the end of 2019”.

The Board notes that “without an easing in monetary policy over the next six months, growth and inflation outcomes would be expected to be less favourable than the central scenario”.

Recall that, the detailed forecasts which were printed in the Statement on Monetary Policy on May 10 highlighted GDP forecast growth at 2.6% and underlying inflation growth at 1.75% in 2019, lifting to growth of 2.75% and underlying inflation of 2% in 2020. These are barely acceptable forecasts with the 2019 forecasts being below trend for growth and below the bottom of the 2-3% target band for underlying inflation.

So the issue really becomes one of the profile for lower rates. Here, the minutes give considerable emphasis to the labour market. The Board points out that international experience suggests that inflation had remained low despite historically low rates of unemployment. It also notes that there is spare capacity in the Australian labour market which would remain for some time. Consequently, there is ample scope for policy to drive down the unemployment rate without overshooting the RBA’s inflation target. As such, the Board concluded that it was important to continue to pay close attention to developments in the labour market.

In the concluding paragraph of the Statement on Monetary Policy, the RBA noted that “a lower rate of unemployment is achievable while also having inflation consistent with the target”. The minutes also refer to the unemployment rate as the key indicator of labour market conditions.

Central banks always give a weighting to conditions in the global economy. Due to the continued disruption to international trade, the Board has noted downside risks to the global economy. We also note that the RBA significantly lowered its forecast for household consumption growth in the SMP from 2.5% in February to 2.0% in May and signalled downside risks.

Conclusion

On February 21, Westpac forecast that the RBA would cut the cash rate in two 25bps tranches in August and November. These forecasts have not changed since then. Subsequently, markets and most forecasters have moved largely towards the Westpac view of two cuts. Indeed, we are pleased that markets now fully pricing in 50bps of cuts by November.

Westpac will continue to monitor its forecasts in light of these minutes and further developments.

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