The RBA minutes confirm for us that the debate at the April meeting was to do nothing versus a further 'modest' adjustment. The key sentence is: "the question for the Board was whether there was a case for additional monetary easing". It appears a 50bp cut was never raised. Although the new staff forecasts anticipate a recession in 2009, they appear comfortable that the current policy setting is 'set' appropriately for a relatively mild downturn.
As noted by most commentators at the time the RBA's growth forecasts had been revised lower; "Members were informed that there had been further downward revisions to the staff forecasts for growth and inflation. GDP was expected to fall in 2009 but increase again in 2010."
We think this confirms recent market pricing for less easing in the next few months but there is nothing in the minutes to suggest the easing cycle is over. That proposition relies on the outlook for the economy and we think that over the second half of the year the RBA is likely to ease further as the economic recovery either flatteners or remains anaemic. To be sure, the RBA expect a recovery in the back half of 2009; "output in Australia was now weaker than earlier expected, though a recovery in demand was likely towards the end of the year."
All this is effectively priced into markets as the rates market has effectively wound back easing expectations over the past month. We think the market can sell-off further in the front month Ibs as the expectations of a pause is solidified in market pricing. That said, we expect further easing over the back half of the year and remain happy with our expectation that the cash rate will trough at around 2%.
Key comment from the minutes; "The interest rate reductions had lowered debtservicing burdens considerably, particularly for households. This stimulus, together with the substantial fiscal measures, would support demand and help to foster economic recovery in due course. Nonetheless, the effect of recent international and domestic information had been that the near-term outlook for demand and output in Australia was now weaker than earlier expected, though a recovery in demand was likely towards the end of the year."
RBA now forecasting recession! The RBA noted the softening in domestic labour market conditions and the likelihood of further deterioration: "Further falls in employment and rises in unemployment were likely." They are also anticipating a drop off in investment activity and highlighted the sharp fall in non-residential building approvals which also prompted us to revise down our domestic economic forecasts in recent weeks: "Non-residential building approvals had fallen very sharply over the past year or so; although construction activity had increased over 2008, it was likely to fall in the period ahead.
On the flipside, some signs of stabilisation in interest-sensitive components of the economy influenced their belief that the substantial fiscal and monetary policy stimulus in the system was providing economic support and would help "foster a recovery in due course".
In particular, the RBA highlighted the sharp fall in household interest repayments which was placing a floor under household spending, with "retail sales still higher than prior to the fiscal stimulus in late 2008." They also highlighted increasing demand from first home buyers, which had prompted a rise in residential building approvals in February and a rise in house prices at the lower end of the market.
The Minutes also focused on the weaker outlook for the global economy and further evidence that "the sharp decline in output recorded in many economies in the December quarter had probably been repeated in the March quarter." The outlook longer term also appeared to have been revised down, with the Minutes highlighting the downward revision to IMF and OECD forecasts. It is interesting to note that RBA staff forecasts for the global economy for 2009 are actually weaker than the IMF.
The weaker outlook comes despite some early signs of growth in the latest international economic data including in China, which the RBA appears to be interpreting with caution: "However, these were tentative and prospects for global recovery still depended on the financial sector being restored to health."
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