Australia | Jul 21 2009
By Greg Peel
In the minutes of the June RBA monetary policy meeting, the board noted: “The latest information was consistent with the tentative assessments at the preceding meeting that the global economy was stabilising after two very weak quarters”.
The minutes of this month’s meeting, released this morning, replace the same line with: “The information available to the Board at this meeting provided further evidence that the global economy was stabilising.”
In other words, if we weren’t likely to get a rate cut last month then there was even less likelihood this month, consistent with economist expectations. The difference might be subtle (the word “tentative” has gone) but assessing central bank statements is all about subtlety. Note the change in these two lines:
June: “Monetary policy had been eased significantly, and budgetary measures were also providing significant support to demand. Indications were that these policies were having some impact, though the full effects would take time yet to be seen.”
July: “In assessing the stance of monetary policy, members observed that the early and substantial easing of both monetary and fiscal policy had been effective in supporting demand, which, if anything, had been more resilient than expected. The full effects of policy measures would still be coming through for some time”.
(My emphasis). In June, the RBA noted that its policy move to cut the cash rate rapidly from 7.25% to 3.0% was only “having some impact”, while in July it had decided that policy “had been effective”. It also noted demand had been “more resilient than expected”, which is a flow-on from the positive GDP number reported for the March quarter. The RBA only received this number after the June meeting.
But the board saw improvement across the globe. (To make the comparison see last month’s review, RBA Will Cut Again If Necessary.)
This month the board noted “output in the major economies was likely to have contracted by a significantly smaller amount in the June quarter than in the previous two quarters, while output in the developing countries of east Asia was likely to have recorded a substantial increase, underpinned by a pick up in growth in China”. While international trade was as yet “showing few signs of recovery”, the rate of deterioration in the US had slowed and “the economy may be reaching a turning point”. Recent data from China “had been positive”, the board noted, as yet oblivious to the 7.9% GDP growth China was about to confirm.
Even Japan got the thumbs up, given “recent data had been more encouraging than they had been for some time”. Europe and the UK were still suffering from weak spending and production, but at least there had been “some improvement in business sentiment”.
On to Australia, and “the GDP outcome for the March quarter had been surprisingly strong”, mostly due to a stronger than expected export performance to China. Fiscal stimulus in the form of cash hand-outs carried over into the month of June, but retailers also suggested lower interest rates were helping to encourage spending. Business investment had fallen, but not by as much as in other countries. Unemployment had not risen by much, but there had been a noticeable drop in hours worked. The housing market continued to look strong due to government grants.
Moving to global financial markets, the board was slightly more downbeat in July than it had been in June. However, the main reason is that when the board met earlier this month, the stock market was quietly waning, and looking weak. We are now retesting the highs, so one assumes the board’s confidence will be restored. And this month the board noted “In Australia, short-term money market spreads were now around the lowest levels in the period since the onset of the financial crisis”.
In June, the RBA acknowledged that China was proving a driving force behind possible recovery but that “uncertainty about the durability of China’s economic recovery inevitably remained”. That qualification was gone this month. Instead, the board noted “Importantly for Australia, the Chinese economy was growing quite robustly, partly due to strong public-sector construction, and production had also picked up in a number of other Asian economies”.
The RBA reiterated its expectation of “subdued growth” for the world economy over the next year or two, noting that while “downside risks had diminished”, “significant vulnerabilities remain” as both businesses and households continue to repair their balance sheets.
On the inflation front, the board suggested a subdued global recovery would mean further increases in spare capacity and thus persistent “deflationary pressures”. But there was a nod to all the quantitative easing and government debt issuance going on at present across the globe, the impact of which the RBA suggested was “unclear”.
The summary for Australia was:
“The outlook thus remained for a gradual recovery to begin later in the year, and downside risks to that had diminished. Labour market indicators were likely to remain soft for some time, though there were signs that employers were making efforts to minimise job shedding.”
But the final line remained unchanged from June:
“Accordingly, members judged that maintaining the current stance of monetary policy for the time being would be consistent with fostering sustainable growth and low inflation, and would leave adequate flexibility to respond to developments as needed over the period ahead.”
So we sat at 3%, but the RBA has not yet indicated it would change its easing stance. We are simply on hold while the board watches what happens next. However, one can only imply from the July minutes, as compared to the June minutes, that things are looking better than the board may have expected.
Already there are economists who have broken ranks and decided that we will not see a cash rate of 2.25-2.75% as previously assumed. We will remain on hold for now, and may even see a rate rise before the year is out, according to a couple of economic optimists. Nevertheless, yesterday’s big second quarter producer price index (PPI) drop suggests that disinflation forces remain stronger than economists were expecting. We will learn the consumer price index (CPI) result tomorrow, but weaker inflation means little likelihood of the RBA raising for some time.
But the July minutes, and the reversal in stock market fortunes since the meeting, also suggest there is a diminishing need to cut rates further and risk taking one step too far. The chance of an interest cut soon is thus fading, although a negative June or September GDP result might change the tune, or something else we won’t see coming. The RBA remains alert – just less alarmed.
Read the full July minutes here.