The minutes of the RBA Board meeting for May are used to clarify the Bank’s policy position. Recall that markets were confused by the lack of policy guidance in the Governor’s statement which was released after the May meeting. That was partly responsible for an ‘unhelpful’ lift in the Australian dollar.The Statement on Monetary Policy ( May 8) sought to partially redress that situation with: “The Board will continue to assess the outlook and adjust policy as needed to foster sustainable growth in demand and inflation outcomes consistent with the inflation target over time.” Analysts interpreted that sentence along with the fact that the Bank had changed its forecast for underlying inflation in 2016 to be in the bottom half of the 2-3% band as indicating that indeed the Bank held a ‘soft easing bias’. There is also an important lesson ibn the preceding paragraph for those of us who follow RBA policy. In describing the decision on whether to cut at the May meeting or wait until June the minutes note: “Members acknowledged that the challenges of communication might be more effectively met with a reduction in the cash rate at this meeting”. This point about communication is very important. The SoMP also provides the opportunity to reassess the Bank’s forecasts. If for instance as it was seen in May the Bank lowers its growth rate forecast from 2.75% to 2.5% (2015) and its inflation forecast from 2.5% to 2.25% without making a policy adjustment the commentary is awkward if the intention is to move in the next month. The OutlookAs discussed, the guidance in these minutes is a little stronger than the “soft easing bias” which is noted from the Statement on Monetary Policy. There is a degree of comfort around the housing outlook; ongoing concern about business investment; modest forward looking indicators of labour demand; and an inflation forecast in the bottom half of the target band. According to Westpac, the key will be progress in the labour market in 2015 and prospects for economic growth in 2016. Clearly the Board is a little puzzled as to why the unemployment rate has not edged up further in the face of clearly below trend growth in 2015. However, it is expecting that upward drift to resume in the second half of the year. It is also expecting that the solid recovery in household spending in the December quarter will continue through 2015 justifying the above trend growth forecast for 2016. Any slippage in those dynamics or a faster than expected lift in the unemployment rate would trigger the risk of a policy response but probably not before November when these trends could be clearly identified. On the other hand, stability in the unemployment rate and an ongoing lift in household expenditure would ensure steady policy. An important aspect of these minutes is that the Board is in no way implying some sort of natural 2% floor to the cash rate. For now, the rates will remain steady until there is further evidence around the trends in unemployment and household expenditure.
The material has been provided by InstaForex Company – www.instaforex.com