RBA minutes make clear case for further rate cuts

Released this week, the minutes of the March meeting of the Reserve Bank board provide further background on the decision to leave the official cash rate unchanged.

However, according to Westpac senior economist Matthew Hassan, the minutes move to an overt easing bias in the accompanying governor’s statement.

“Recall that the closing paragraph of the governor’s decision statement included the line that: ‘… it was appropriate to hold interest rates steady for the time being’,” Mr Hassan said, explaining that the “for the time being” qualifier can be taken as a clear indication that further policy moves are likely.

“The phrase has been included in eight of the previous 67 post-meeting statements since 2008, and every time has been followed by a rate move over the next two months (six being the month after and two the second subsequent month),” he said.

Prior to this statement, Mr Hassan noted that the RBA had presented a ‘softer’ easing bias in the form of the ‘market pricing’ assumption on interest rates used in its economic forecasts presented in the statement on monetary policy.

“Not surprisingly, the “for the time being” phrase is repeated in the concluding paragraph of the ‘Considerations for Monetary Policy’ section of the minutes,” he said.

“The minutes show the board considered cutting rates again at the March meeting but decided against this in the interests of allowing more time to: 1) see how financial markets (‘the interest rate structure’) and the economy react to the February move; and 2) receive ‘more data to indicate whether or not the economy was on the previously forecast path’."

Mr Hassan said the second point likely refers to the fourth quarter national accounts estimates, which were released the day after the March meeting, and showed GDP growth ticking over at 0.5 per cent per quarter, 2.5 per cent per year, but with sub-2 per cent annualised growth momentum over the second half of 2014 and still weak domestic demand conditions (+1.2 per cent year).

The closing paragraph of the RBA minutes also notes “the greater degree of uncertainty about the behaviour of borrowers and savers in a world of very low interest rates”.

“That comment was elaborated on by Deputy Governor Lowe in a speech on 5 March, in which he suggested the continued focus of Australian households on paying down debt and the sensitivity of households reliant on interest income may have affected the operation of some of monetary policy’s transmission mechanisms, namely the cash flow boost from lower interest rates to spending.

“While these ideas are not new, raising their prominence in the minutes underscores the bank’s current easing stance.

“Overall, these minutes reiterate the bank’s overt easing bias set out in the governor’s decision statement and are consistent with another move in the April-May window,” Mr Hassan said.

Although it is unclear which month the central bank favours, there are more general indications that it will likely maintain a ‘soft easing bias’ for some time yet. References to the degree of excess capacity in labour markets, the weaker than expected medium-term outlook for non-mining investment, and uncertainty around the behaviour of borrowers and savers, suggest it will continue to see potential scope for additional stimulus if required beyond the April-May move, Mr Hassan said.