RBA minutes more upbeat
The broad take away from the minutes is that they sounded more upbeat on the global economy, domestic govt infrastructure spending, employment, and wages. They acknowledged higher prices coming from electricity and placed a figure on how significant is current policy accommodation.
AUD has reacted significantly to these minutes, as have the rates outlook – 2yr swap rates are up 9bp. However, a full 25bp hike is still not fully priced into the curve until October 2018.
It is interesting to note that the AUD dropped sharply after the July policy statement on 4 July, and it bounced sharply on the release of the minutes from the same meeting.
The Policy statement on 4 July was little changed from the June statement suggesting that the RBA had not been moved much by trends abroad towards less policy accommodation.
However, the minutes do show that the RBA had become more upbeat on the global and domestic economic outlook.
In its final paragraph, where it provides a final overview on the policy decision and outlook it added a positive comment on the global assessment. It said, “Members regarded the improvement in the world economy over the preceding months as a welcome development.”
It acknowledged the improvement in the labour data since June. In its monetary policy discussion it said, “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.”
In its domestic economy discussion it also noted some upward pressure on wages that would come from the larger rise in the minimum wage effective from 1 July.
A new discussion point in the domestic economy was growth potential from government spending on infrastructure.
It said, “The most recent Australian and state government budgets suggested that fiscal policy would be more expansionary in 2017/18 than had previously been expected. Some of this expansion was expected to come from more spending on public infrastructure, particularly in New South Wales. Reflecting this, work yet to be done on public infrastructure had increased in recent quarters to a relatively high share of GDP. Members noted that infrastructure investment was expected to have significant positive spillovers to other parts of the economy. Non-residential building approvals had also risen in recent months.”
This rated a mention in the final consideration of monetary policy, where the minutes said, “Recent state budgets and data on non-residential construction suggested that the contribution to growth from infrastructure investment would rise.”
The domestic economy discussion mentioned the sharp rise in electricity prices for wholesale, spilling over to retail. It didn’t go on to infer anything about upcoming CPI data, but clearly, it is a new inflationary element. Perhaps transitory, and something to look through, but at the margin another reason to be less dovish.
High levels of household debt were still seen as a downside risk for consumption. However, the minutes noted that this risk was mitigated somewhat by higher employment growth.
It said, “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.”
Interestingly, the RBA had less to say on the housing market, it shortened its comment in the Considerations for MP to “Members recognised that it was too early for the prudential supervision measures announced by the Australian Prudential Regulation Authority, which were designed to help address the risks associated with high and rising levels of indebtedness, to have had their full effect.” Overall, it does not appear views on the housing market had changed.
The RBA Board were also briefed at this meeting on research on the neutral interest rate. It is hard to say if this was just a coincidence with the global trends towards less policy accommodation, but some may see it as asubtle hint that the RBA is in the early stages of thinking about normalizing policy by raising rates.
Their research found that the neutral interest rate was around 3.5%, down from around 5% before the global financial crisis in 2008. This suggests that the RBA is currently around 2% below neutral, suggesting that policy is currently quite significantly accommodative.
It said, “Members discussed the Bank’s work estimating the neutral real interest rate for Australia. The various estimates suggested that the rate had been broadly stable until around 2007, but had since fallen by around 150 basis points to around 1 per cent. This equated to a neutral nominal cash rate of around 3½ per cent, given that medium-term inflation expectations were well anchored around 2½ per cent, although there is significant uncertainty around this estimate. 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, given that the bulk of the decline in the estimated neutral real interest rate had occurred around that time. Estimates of neutral real interest rates for other economies had shown a similar decline. 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.”