Dovish RBA Minutes Suggest Policymakers Somewhat Less Confident About Economy

While most of the content of the minutes was widely anticipated, the Reserve Bank did warn that falling household consumption, fueled by declining real estate values and high debt levels is a key source of uncertainty for the Australian economy.
James Hyerczyk
Australian Dollar
Australian Dollar

The Australian Dollar is holding steady on Tuesday following the release of the Reserve Bank of Australia’s (RBA) December meeting minutes. In its minutes, the RBA reiterated its growth forecasts, but policymakers expressed concerns over a housing market correction and slowdown in consumption.

In the minutes, the RBA board restated that the next move in interest rates was more likely to be up than down, but said there was no strong case for a near-term adjustment in the cash rate, which remains at a historical low of 1.5 percent.

“The current stance of monetary policy would continue to support economic growth and allow for further gradual progress to be made in reducing the unemployment rate and returning inflation towards the midpoint of the target,” the RBA said.

“Members assessed that it would be appropriate to hold the cash rate steady and for the bank to be a source of stability and confidence while this progress unfolds.”

The RBA also noted the downside risk to global inflation due to oil price declines and said the pace of the Chinese economy was “difficult to gauge”.

Housing Correction and Consumption Slowdown Are Key Economic Risks

While most of the content of the minutes was widely anticipated, the Reserve Bank did warn that falling household consumption, fueled by declining real estate values and high debt levels is a key source of uncertainty for the Australian economy.

In the minutes, RBA policymakers noted evolving headwinds as “this combination of factors posed downside risks”.

Australia’s central bankers also noted that housing markets in Sydney and Melbourne had continued to ease from record-high values and that lending had tightened as a result of the revelations from the banking royal commission.

“Lending to investors had remained very weak and growth in lending to owner-occupiers has continued to ease…credit conditions were tighter than they have been for some time,” the RBA wrote in its minutes.

“The focus on responsible lending obligations in response to the royal commission … was likely to have reduced some lenders’ appetite for lending to both households and small businesses.”

Westpac Responds to Minutes

Westpac said “sentiment in these minutes is somewhat less confident about the Australian economy than we have seen in previous minutes, although the outlook for higher rates is once again confirmed.”

Westpac also said “the Bank cannot be described as having moved to a ‘neutral’ bias.

Westpac went on to say, “However, taking into account the attention given to the credit; housing, consumer and external risks”, the minutes are dovish.

As far as the RBA’s benchmark interest rate is concerned, “Westpac has consistently called the cash rate on hold since the August 2016 rate cut … Markets are now closely priced to our current view that rates will be on hold in 2019 and 2020.”

Westpac concluded its assessment of the minutes by saying, “However, traders will want to price-in some scenario for “rates activity”. These minutes are more likely to encourage them to price-in lower rates than the alternative.”

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