July RBA minutes confirm our expectation that the RBA will take a break from rate cuts. We continue to expect a third cut to be delivered in November.

The minutes of the July monetary policy meeting of the Reserve Bank Board confirm that the Board is still open to further monetary easing, although as we had expected, prospects for a third consecutive easing in August have been dampened.

The best way to assess the likelihood of a move in August is to compare the wording in the June minutes with the wording in the July minutes. In the June minutes, the key “considerations” section noted “members agreed that it was more likely than not that a further easing in monetary policy would be appropriate in the period ahead”. This very strong sentence was not repeated in the July minutes.

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Furthermore the minutes do state that “the Board will continue to monitor developments in the labour market closely, and adjust monetary policy if needed”. In the June minutes, the “if needed” qualification was not used, merely saying instead “members agreed that in assessing whether further monetary easing was appropriate, developments in the labour market would be particularly important”.

Finally, my experience is that when a central bank decides to pause, it often refers back to previous policy decisions. In the final paragraph of the July minutes, the Board notes “this decision, together with the reduction in the cash rate decided at the previous meeting, would assist in reducing spare capacity in the economy”.

Other points which are worthy of noting are:

  • The Board confirms that it expects that GDP growth will return to trend over coming years. That comment provides a fairly clear indication that the GDP forecasts that will be provided in the August Statement on Monetary Policy will maintain the view that GDP growth in 2020 will reach 2 ¾ per cent. Westpac expects that following further evidence around the economy’s momentum through 2019, this growth forecast will need to be revised down in the November Statement on Monetary Policy, paving the way for a further rate cut at the November meeting. In that regard, it is interesting that in previous communications, the dominant emphasis has been on reducing spare capacity in the labour market, the decision to cut rates was also impacted by the recent disappointing data on output growth, which is described as well below trend over the year to the March quarter. Despite the prospect of some lift in income growth from the legislated tax cuts, the outlook for consumption growth remains uncertain.
  • The description of the housing market continues to be cautious. Conditions in Sydney and Melbourne are noted to have stabilised, although rising auction clearance rates were on low volumes, and more generally, turnover in the housing market had remained low.
  • The Board explicitly dismisses any prospect of a further decline in interest rates “encouraging an unwelcome material pick-up in borrowing by households that would add to medium-term risks in the economy”. This is important, since lower rates are expected to support the economy through a more competitive currency and the freeing up of cash for borrowers, but any spill-over into excessive borrowing would always be seen as a constraint for policy.
  • The focus on the labour market remains clear with the unemployment rate, the underemployment rate, and wages growth being the key indicators of spare capacity. The Board notes that developments in these variables continue to indicate that spare capacity was likely to remain in the labour market for some time. That observation indicates that the Board expects that a further easing in monetary policy will be “needed”.
    Finally, it is worth noting that the Board specifically addresses the recent uplift in the Australian dollar. It points out that it is important to assess the currency effect on the basis that without the rate cut, the exchange rate would have been higher as other central banks continue to ease policy.

Conclusion

On May 24th, Westpac complemented its February call for two rate cuts in the second half of 2019 with the likelihood of a third cut. However, we expected that there would be some months break between the second and third cuts. With the first two cuts now having been delivered, and some clear signals from these minutes that the Board is likely to pause before further adjustments, we remain comfortable with our call that the next move will be in November.

The minutes confirm that the Board is prepared to move and probably expects to move again but prefers to wait a while to assess the impact of the first two cuts. Our forecasts for growth, inflation and the unemployment rate clearly point to the need for further stimulus, and we expect that the November meeting will provide that timing. However we do recognise that while growth and inflation remain key policy objectives, the labour market has the most immediate priority. With updates to conditions in the labour market being provided on a monthly basis, prospects for the next move being as early as September or October cannot be dismissed.

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