■ The downwardly revised 2013 inflation and growth forecasts also indicate that rate cuts, so far, are not lifting activity sufficiently to reduce the upward bias to the unemployment rate.
■ The upcoming wages and capex data are the next hurdles. Weakness in both opens the door for another rate cut.
The overall tone of the minutes implies that the next few Board meetings are “live”, with another rate cut data dependent. A low private sector wages outcome tomorrow, followed by weaker than expected capital expenditure plans next week, is likely to prompt another rate cut. The RBA has inflation forecasts predicated on private sector wages growth easing to around 3¼%pa, a level not seen since the aftermath of the GFC in mid‑2010.
The minutes suggest that the RBA is much more comfortable with conditions in the international economy and in financial markets than it was last year. The central bank noted that global economic conditions had been a “little more positive” and that the downside risks had “abated somewhat”. Growth in China, Australia’s largest trade partner, had “stabilised”, underpinned by policy stimulus. This contributed to a rally in iron ore spot prices in recent months. The central bank also sees improvement in the US economy, reflected in broadly positive recent economic indicators. The RBA notes that structural problems in the euro area remain, but that earlier policy announcement had contributed to stability in markets in the region. Notably, funding costs at the short end, in euro area periphery countries, had declined.
The RBA noted that conditions in financial markets had continued to “improve” over the past couple of months following policy developments in the US and Japan and better‑than‑expected economic data. The central bank pointed to the rise in equities and the rise in yields as to evidence of improving sentiment. In addition, volatility in financial markets had fallen. Credit market conditions were suggested to be “favourable” with investors continuing to hunt for yield.
The minutes noted that data on the domestic economy has been mixed over the past few months. Housing lending and non‑mining business investment remained lacklustre even with lower interest rates. As a result, the unemployment rate is expected to move higher over the next few months before the effects of lower interest rates flow through. Business surveys for most industry sectors remained below average. There were some signs that activity in the housing sector had firmed, with building approvals up from mid‑2012. Resource export volumes rose strongly in the last quarter of 2012 and should lift QIV GDP. Commodity export prices were mixed. Iron ore recovered but coal prices were still well below the levels of a year ago.
One area of higher activity was private sector debt issuance which appeared to have risen as financial market volatility fell. It is likely to mean a substitution of bank intermediated debt with corporate bonds held by onshore and foreign groups. It implies that overall funding costs are lower and could mean that the private sector is better placed to lift investment spending, if it wants, through 2013.
The RBA’s comments on inflation indicate that it finds the low tradables outcomes of the past few quarters are greater than implied by traditional relationships to the AUD’s movements. It most probably reflects ongoing competitive pressures in the retail sector. Higher services prices pushed the non‑tradables inflation outcome a little higher than expected. The RBA expects inflation to stay in the mid‑point of the target band through the forecast period which stretches out to 2014. The summary points at the end of the minutes indicate that the inflation projections are unlikely to stand in the way of more rate cuts, if they are required to stimulate demand.
Market are pricing in about a 26% chance of a March rate cut. They still see a terminal cash rate of 2.5% in QIII 2013 as the most likely outcome.