The RBA Board has taken a step closer to cutting rates by emphasising the near-term importance of data releases. Westpac sees this approach as consistent with its expected timetable of rate cuts in August and November.
The Minutes of the March Reserve Bank Board meeting emphasise the Board’s uncertainty around the slowdown in output data while labour market data remains robust.
In the final paragraph of the section on the policy outlook, the Board noted “they assessed that it would be appropriate to hold the cash rate steady while new information became available that could help resolve the current tensions in the domestic economic data”.
Presumably, the release of the December quarter national accounts the day after the Board meeting will have further accentuated this tension. In the minutes, the Board speculated that “GDP growth over 2018 had been a little lower than anticipated at the time of the February Statement on Monetary Policy”. In fact, annual GDP growth in 2018 printed 2.3% compared to the RBA’s estimate in February of 2.75% – hardly consistent with the description “a little lower”. The minutes also noted that the accounts were likely to confirm a “markedly slower pace of growth in the second half of 2018 than in the first half”. In fact, the accounts printed a 4% annualised pace in the first half, down to a 1% annualised pace in the second half.
The tension that the minutes refer to is around conditions in the labour market, which “had continued to improve”, while “leading indicators continued to suggest that employment growth was likely to remain above average, although some indicators have turned down a little recently”.
Based on the key policy conclusion, developments in the monthly labour market series and associated lead indicators will be very important for the policy response, although the sharper than expected slowdown in 2018 H2 will probably make the RBA more prepared to act than appears to be the mindset in these minutes.
Because the forecasts are only reviewed every three months, it is entirely unsurprising that the minutes confirm the current GDP growth forecast in 2019 of 3 per cent and a further decline in the unemployment rate to 4 ¾ per cent over the next couple of years. With the momentum in the economy having slowed to a 1% pace in the second half of 2018, it remains a courageous call that growth could lift to 3% in 2019. Westpac expects that the RBA will lower its forecast for 2019 to 2.75% and to 2.5% in 2020 in its May Statement on Monetary Policy and adopt a specific easing bias.
We are disappointed to note that the RBA is persisting with a view that “the pipeline of work to be done remained large and was expected to support dwelling investment through 2019”. It appears that dwelling investment peaked in mid-2018 with around a 6 per cent fall in the second half of 2018. We support the RBA’s expectation for a “marked slowing in dwelling investment”, but expect that this has come earlier than their expectation of “in 1-2 years’ time”.
Nervousness around consumer spending remains a consistent theme in these minutes. Indeed, the expectation was that “consumption was expected to have contributed more to growth in the December quarter than in the September quarter”. In fact, December’s consumption growth of 0.4% was only slightly greater than the 0.3% reported for September. A 1.5% annualised growth pace for consumption is around half the expected trend.
The discussion around housing remains quite understated, “the process of adjustment in the housing market had continued”, although there is some recognition of the spill-over of housing prices to activity, “some part of the slowdown in retail and motor vehicle spending in NSW was likely to have been related to declines in housing prices”.
We are always interested in how the Board describes market pricing. According to our pricing model, the market was giving an 88% probability of a rate cut of a full 25bps by December 2019 as at 4 March. In contrast, the minutes note “financial market pricing implied the cash rate was expected to remain unchanged in 2019, but a reduction in the cash rate was expected by early 2020”.
Finally, it is important to note that “members noted significant uncertainties around the forecasts remain, with scenarios where an increase in the cash rate would be appropriate at some point, and other scenarios where a decrease in the cash rate would be appropriate”. As the Federal Reserve likes to emphasise, policy has become “data-dependent”.
Conclusion
The Board has raised the importance of data releases over the next few months and has left open the possibility to cut rates should those releases disappoint. Certainly, the December quarter national accounts would have fitted into that category, although the emphasis remains on the labour market data.
Westpac does expect that consistent with the slowdown in spending and deterioration in both business and consumer confidence, we will see emerging evidence of a slowing labour market over the course of the next six months.
Westpac’s timetable for policy action remains a 25bps cut in August to be followed by a second 25bps cut in November. These dates will give the RBA appropriate scope to explain their decisions in the context of weaker growth, employment and inflation forecasts in an orderly fashion, rather than be seen to overreact to any particular data report.
