The Reserve Bank took its hands off the interest rate increase lever at its June board meeting and won’t put it back until it’s ready to push the rate cut button later this year or in early 2009.
The minutes of the June 3 meeting reveal no discussion or contemplation of a rate rise, unlike what we saw at the May meeting — then, though the cash rate was ultimately left untouched at 7.25%, the board (management?) was tempted to push it up a quarter of a percent, from the way the minutes read.
“Wait” was the final call in May and it was a good one because the pace of the slowdown in the economy has quickened in the intervening four weeks.
Today the minutes said:
In reaching their decision, Board members noted that the bulk of indicators becoming available over the past month continued to suggest moderation in the growth of domestic demand.
These included flat retail sales, declining household and commercial loan approvals, lower growth in housing and business credit, and subdued business and consumer confidence. Asset markets were also less buoyant than previously.
Labour market conditions, on the other hand, had remained strong to date. This could be explained by lags, in which case a moderation in employment growth could be expected soon.
Members agreed that it was important for the slowing trend to continue. In discussing the outlook, they noted that there remained considerable uncertainty in the forecasts for demand and inflation, as there were strongly opposing forces operating on the economy.
While financial conditions were working to moderate demand, the rise in Australia’s terms of trade that was currently occurring would work in the opposite direction, and would add substantially to national income and ability to spend.
There was also a high degree of uncertainty about the international economic outlook, in particular the extent of the slowdown that was occurring in the developed economies. Conditions in international financial markets, though gradually improving, also remained difficult.
On balance, the Board’s assessment continued to be that, on current policy settings, the necessary moderation in demand growth was likely to occur. They concluded that it was therefore appropriate to maintain the current setting of monetary policy for the time being.
However, should demand not slow as expected or should expectations of high ongoing inflation begin to affect wage- and price-setting behaviour, the outlook, and the stance of policy, would need to be reviewed. The Board would continue to evaluate prospects for economic activity and inflation in the light of new information.
You can sense from the comment about the labour market that there was a certain puzzlement in the RBA about the continuing strength of the jobs market, even though they know it is a lagging indicator.
The 19,500 jobs lost in May showed it too was catching up to the slump in domestic demand. The Australian Bureau of Statistics report for May last Thursday came well after the board meeting, but must have relieved the Bank’s staff and management who seemed to be wondering just when employment would be moved by the slowdown in consumption apparent in retailing and residential construction.
The May jobs figures (and so long as they are followed by more losses in coming months) will make the decisions over the next few months just that much easier, even when the expected surge in the June quarter’s Consumer Price Index is reported in late July and considered at the August meeting.
Meanwhile Macquarie Bank interest rate strategist, Rory Robertson is one market economist who reckons the jobs figures are the final factor ruling out any further increases in official interest rates.
He wrote this morning before the minutes were released:
The RBA last Tuesday would have cheered the latest falls in consumer confidence (down 6% to 85 in June) and housing finance (value down 5% in April, ex-refinancing).
Its cheering would have been louder on Thursday, in response to the first fall in employment in 19 months (down 20k in May). Tight policy is biting hard, and for a couple of months now it has seemed likely to me that the RBA’s rate-hike show is over.
With its most-aggressive-tightening campaign in a decade and a half (lending rates increased about 1-1/2pp in nine months), the RBA has been gunning for a significant deceleration in demand and rising unemployment, to dampen developing price and wage pressures. Household spending clearly has slowed: retail sales, car sales and the uptrend in home prices all have stalled in the first part of 2008.
Now, the jobs market is showing clearer signs of softening in response to that unfolding weakness in demand. ANZ’s newspaper job ads series continued to trend lower in May, including in the resource-rich States of Queensland and Western Australia.
Overall, unemployment probably is in the process of rising from 4% towards 5%, as jobs growth stalls under the weight of decade-plus highs in interest rates, tightening credit conditions, multi-decade highs in the A$ and all-time highs in fuel prices (think of higher fuel prices as a tax on transport-intensive activities).
Why wouldn’t consumer confidence be slumping? It seemed to many that the decade and a half of good economic times might never end. And then it did, as interest rates and fuel prices went through the roof.