No smoking gun for August rate cut

Investors anticipating a cut in Australia’s official cash rate to 2.5 per cent next month look set for disappointment.

The minutes of the Reserve Bank of Australia’s 2 July Board meeting suggest a central bank happy with its current policy settings, rather than itching to provide another dollop of stimulus to the economy.

Speculation about a rate cut took flight last week when official figures showed the unemployment rate edged up to 5.7 per cent in June.

Market expectations of an August rate cut had already been edging higher before the labour market update was released, but the 0.1 percentage point rise in the jobless rate was enough to convince several commentators, and more than a few investors, that the case for further monetary policy easing had been made.

But the RBA Board Minutes released today should give all some pause for thought.

They show that the central bank had anticipated that softness in the labour market could see the unemployment rate move higher.

Looking beyond the monthly volatility in the jobs numbers, the RBA saw that annual employment growth – at a little more than 1 per cent – was not enough to keep the jobless rate down.

It noted that leading indicators pointed to only modest employment growth in coming months, suggesting that the “gradual upward trend” of unemployment observed in the past year was likely to continue.

The Minutes included to other important signals that show the Reserve Bank is still some way from being convinced of the need for a further rate cut.

Yes, domestic economic growth is below average, and yes, the mining investment boom has probably peaked, and yes, consumption growth has been modest, and yes, the outlook for non-mining investment is uncertain.

But the central bank thinks the housing market is gradually building momentum, and that the recent 12 per cent depreciation in the Australian dollar has both helped offset the fall in global commodity prices for Australian miners and given a boost to exporters. Added to this, inflation pressures remain contained and labour costs have actually declined.

All in all, the RBA sees little need for haste in adjusting monetary policy, as the following excerpt from the Minutes attests: “The effects of lower interest rates were apparent across a range of indicators and, given the lags involve din the transmission of monetary policy, this process has further to run.”

The central bank sees the floating exchange rate as doing at least some of the policy work for it. The Minutes said “it was possible that the exchange rate would depreciate further [it has, dipping briefly below US90 cents earlier this week], which would help foster a rebalancing of growth in the economy”.

For the benefit of those not yet convinced that a rate cut is not imminent, the Minutes added “given the exchange rate adjustment that was occurring, and with the substantial degree of monetary policy stimulus already in place, members assessed that the current stance of policy to be appropriate for the time being”.

For those looking for the smoking gun on monetary policy, the unemployment rate is not it, and nor is the drop off in mining industry investment.

What is most likely to make the RBA move again is a sustained relapse in housing activity, a reversal in the US economic recovery or a much harder than expected landing for the Chinese economy.

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