After lowering the official cash rate, or OCR, by 25 basis points to 2 percent earlier this month, the Reserve Bank of Australia relayed through the minutes of the May 5th meeting released Tuesday that the board members’ choice to leave out guidance on monetary policy in the post meeting policy statement does not limit their scope for any action appropriate at future meetings.
The markets construed the statement as the central bank’s willingness to lower rates further if warranted. The Australian stock market that was sharply lower ahead of minutes cut its losses and briefly sneaked above the unchanged line.
The board members seemed to have deliberated the timing of an interest rate adjustment and were undecided between the current meeting and the next. With the revised staff forecast to be released a few days following the meeting, members felt that a rate cut at the current meeting was appropriate in light of addressing the challenges of communication.
Discussing the prospects for global growth, the RBA noted that growth has slowed only slightly and will be continued to be supported by stimulatory policy. The RBA expects a hit to its terms of trade, given the slowdown in the property market in China, which has hurt the demand for commodities-related to construction.
The bank feels that capital spending in the mining and non-mining sectors would be weaker than expected notwithstanding the generally positive growth. The growth would now take longer to strengthen and the unemployment rate will remain elevated, the bank noted. With subdued wage growth keeping inflation in check, the central bank felt that it was appropriate to cut the OCR at the May meeting.
The members also felt that further depreciation of the aussie is likely and essential for balanced growth, given the significant declines in commodity prices.
“We expect the RBA to stay on hold, though as today’s communications make clear, if the real economy underperforms, housing market exuberance will not (at this stage) hold back the Board from cutting again,” said Ben Jarman, economist at J.P. Morgan Australia.
In the meeting, the bank noted that the growth forecast of Australia’s major trading partners would remain close to its long-run average in 2015 and 2016, after a modest ease in the early months of 2015.
The domestic economic growth was expected to continue at a pace a bit below average over the coming year before picking up gradually to an above-average pace over the course of 2016/17.
“… today’s Board minutes show officials at pains to emphasize that while: they have made a conscious decision to remove their explicit bias/guidance; and they still retain “scope” to cut in the future if needed,” said Jarman.
Fiscal consolidation by the federal and state governments was expected to contribute to subdued growth of domestic demand over the forecast period. Forward-looking indicators of labor demand had continued to point to modest growth of employment over coming months.
The bank expects headline CPI inflation was forecast to remain below 2 percent in year-ended terms through to mid 2015, before picking up to be consistent with the target thereafter.
“For us the key will be progress in the labor 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,” Westpac Chief Economist Bill Evans said.
“Consistent with our assessment of a soft easing bias we see the risks to the cash rate outlook as clearly to the downside,” Evans said.
The material has been provided by InstaForex Company – www.instaforex.com