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RBA Minutes: No surprises, indicates subdued mood - Westpac

Bill Evans, Research Analyst at Westpac, explains that there were no major surprises in the minutes of the Monetary Policy Meeting of the Reserve Bank Board for November. However, the general tone of the minutes seems somewhat more subdued than we have seen in recent reports, he further adds.

Key Quotes

“The Board is sticking with its expectation that inflation will increase but the pace is described as “only gradually”. This is consistent with the revised forecasts for underlying inflation for 2018 and 2019. In August, the Bank forecast underlying inflation at 2.0% in 2018 and 2.5% in 2019 (mid-points of the range). This has now been revised to 1.75% in 2018 and 2.0% in 2019.”

“The downward revision in the level of inflation is attributed to the reweighting of the CPI by the Australian Bureau of Statistics. That explains the move from 2.0% (mid-point) to 1.75% in 2018. However, that downward revision does not explain the decision to reduce the 2019 forecast from 2-3% (2.5% mid-point) to 2.0% - a further 0.25ppt adjustment is not justified by the movement to annual revisions. This is likely to indicate the expectation that the pick-up in inflation will be slower than previously expected.”

“There is clear concern about weak wages growth, “various measures of growth in wages had not yet picked up and had been lower in  preceding quarters than forecast a year earlier”. Some recognition that part of this explanation might be structural is given, “the possibility that globalisation and technology were leading wage growth to be less responsive to changes in the demand for labour”. This was noted as a global theme and may explain partly the decision to slow down the pace of the expected pick-up in inflation.”

“Commentary around the consumer is downbeat. Retail sales have been weak and consumer spending in the September quarter is expected to be lower than in June – the outlook depended upon household income growth which is described as “uncertain”. Of genuine concern is the risk that households make sustained changes to their consumption and savings decisions if they expect low income growth to persist.”

“The Minutes continue to emphasise the need to manage risks associated with high and rising household debt. It is recognised that housing credit growth has eased a little but remains faster than household income growth. Prospects for this issue to create less concerns for the Board are encouraging – “conditions in the established housing market had eased in all major cities”. These conditions are of course a lead indicator for credit growth and associated rising household leverage. If household leverage is increasing modestly not because credit growth is lifting, but because income growth remains subdued, the authorities are likely to be comfortable with rising debt. Concerns around rising household debt should really be relevant only when credit growth itself is lifting.”

“The Bank continues to recognise the strong employment growth. However there is a high degree of uncertainty around associated wage pressures and the resulting inflationary pressures. If pressure on margins from strong competition persisted, and along with faster productivity growth, there could be a delay in the pass through to inflationary pressures.”

“The Board noted that “expectations of future cash rate movements implied by financial market prices had been scaled back indicating that the cash rate was expected to remain unchanged over the following year or so”. In fact, our assessment of market pricing is still pointing to around a 75% chance of a rate hike by November next year. This interesting observation from the Board may indeed be revealing their own current preferences. Certainly the mood of these minutes is consistent with an expectation that no change in rates is the likely scenario.”

Conclusion

  • The Board continues to highlight the need to manage risks associated with high and rising household debt. Markets, which continue to  expect  a rate hike next year are probably relying on that concern. Certainly the inflation environment, as assessed by the Bank itself, does not support the case for higher rates.
  • However, while a modest lift in leverage might evolve over the next year that will be driven by weak income growth since credit growth is already slowing and housing conditions are easing. A policy response to further weaken credit growth and weigh on income growth seems inappropriate.
  • Westpac continues to expect that rates will remain on hold over the course of 2018 and 2019.”

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