Australian Economic Update : RBA Board minutes

Australian Economic Update

RBA Board minutes

The Reserve Bank today released minutes from the March 3 Board meeting, at which the cash rate was held steady at 3.25%. The minutes reveal that the decision was a close call, with Board members seeing "reasonable cases" for a rate cut and for leaving policy unchanged. On balance, they judged the best course of action was to leave policy "flexibility" for future meetings, keeping in mind the RBA already had slashed the cash rate a mammoth 400bp since early September. Seeking policy "flexibility" is code for keeping policy ammunition in reserve in case things go even more pear-shaped. The fact that the March decision was a close call implies the cash rate almost certainly will go lower - the only doubt is over the timing. As such, each meeting from here is "live", although we still favour the RBA staying on hold for another month or two as officials continue to assess the impact of the policy stimulus already delivered.

According to the minutes, there were two main reasons RBA officials believed the current policy rate was appropriate. First, Australia's economy was performing better than most - the minutes reveal that the RBA anticipated a small fall in GDP when the National Accounts were released the day after the Board meeting, so this would not have been a post-meeting shock. Second, and, in our view, most importantly, the minutes indicate that there had been insufficient time to for the RBA to asses the impact of the substantial monetary and fiscal stimulus already delivered. The latter argues in favour of the RBA staying on hold in the very near term given, in particular, that more fiscal stimulus was delivered only last week.

Since the last Board meeting on March 3, though, the news on the global economy has been almost exclusively grim, save for snippets of good news in areas such as car sales, which have bounced. Moreover, evidence has emerged that Australia's economic performance rapidly is coming back to the disorderly pack - the Aussie economy has dropped into recession (GDP almost certainly will fall again in the current quarter), and the jobless rate has spiked to a four-year high amid a blizzard of high-profile job loss announcements. The minutes, though, indicate that the RBA anticipated a "significant deterioration" in the unemployment rate, so this too should not have been a shock. We are, though, well on the way to our forecast peak for the jobless rate of 9% in late 2010. On the flipside, risky asset markets have shown encouraging signs of improvement in recent days.

We are confident the RBA’s easing cycle is not yet over, and that at least 50bp of further easing is in the policy pipeline. The next rate cut could indeed come as early as the next Board meeting on April 7 but, if so, RBA Board members will need a clear trigger to justify the about-face. Having set a high benchmark for staying on hold, something material has to happen to restart the easing cycle. Indeed, if officials are true to what the said when announcing the March 3 Board decision, they will sit on the policy sidelines for a little while longer.

Getting a decent handle on how the Government's cash hand-outs, which the minutes indicate will provide "significant stimulus" to the economy over the next two years, and the RBA's earlier rate cuts are affecting the economy should delay further rate cuts until mid-year. This remains our base case - we expect two 25bp rate cuts from here, one in June and another in July. These will leave us at what we believe will be the terminal cash rate of 2.75%. That said, bearing in mind how close a call the March decision apparently was, we cannot rule out an earlier move, perhaps even on April 7. We also can't rule out the possibility that the RBA cuts the cash rate more deeply than we currently forecast. It will be difficult, for example, for RBA officials to sit on their hands as unemployment climbs towards double figures.

There is an avalanche of speeches by RBA officials scheduled for coming days, starting Thursday with a speech by Assistant Governor (Economic) Malcolm Edey and including speeches next week

ENDS

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