Central Bank Views

RBA Minutes: More Confident Over Job Market, Less Action Against Rising Aussie

Typography

The RBA minutes for the September meeting contained little news. Four main areas of discussions include employment situation, Australian dollar, iron ore prices and the balance of household debt and low inflation. Policymakers acknowledged the improvement in the employment market, noting higher participation rate and steady unemployment rate. RBA appeared less worrisome about Aussie's strength. By attributing the appreciation of the Australian dollar to USD's weakness, it appears less likely that RBA would take actions to curb its strength. RBA expected iron ore prices to fall amidst new supply. As the biggest exporter of iron ores, Australian dollar has been affected by the movement in iron ore prices.

Employment

RBA acknowledged the broad-based improvement in the employment market. The members also noted that full-time employment had 'risen strongly over the preceding year (even though it had declined in July) and had outpaced the growth in part-time employment over that period'. The members believed that trend of solid growth should continue. The central bank was also aware of the slow increase in wages, suggesting that low growth in wages and inflation should stay 'for some time'. Yet, they believed there would be 'a gradual increase' in wage and inflation as 'the spare capacity in the labour market was reduced and the economy continued to strengthen'.

Household Debt vs Low Inflation.

Low wage growth in light of a prosperous housing market has, however, posed the risks of 'growth in housing debt having outpaced the slow growth in household incomes'. RBA's monetary policy strategy should focus on balancing such risk.

Australian Dollar

The central bank softened its tone over Aussie's strength. As noted in the minutes, the members suggested that 'the appreciation of the Australian dollar over the course of 2017 had, in large part, reflected a broadly based depreciation of the US dollar'. This implies a shift of focus to Fed's monetary policy stance and the US economic growth outlook. The Fed is widely expected to make formal announcement of the balance sheet normalization plan at this week's meeting.

Iron Ores

Iron ores prices have rallied more than +30% over the past three months. Most the strength is driven by front-loaded demand for steel production as China is about to curtail the steel capacity in winter. As RBA noted in the minutes, iron ore prices should decline in the period ahead due to rising supply and peaking of Chinese steel production.