Sydney - Tuesday - September 16: RWE Aust Business News) -The RBA today released the minutes of the September Board meeting, when members elected to cut the cash rate target for the first time since December 2001. As we had expected, the minutes revealed little that was new. After all, RBA Governor Glenn Stevens provided detailed testimony to Federal Parliament last week, so there was little about the RBA's perceptions of the growth and inflation outlook that had not already been revealed. Also, when announcing the 25bp rate cut earlier this month, the RBA explained clearly the reasons for the move. Chief economist for J.P Morgan Australia, Stephen Walters pointed that what was less clear back in early September, however, was the RBA's guidance on the speed at which the cash rate would be lowered. Back in August, the RBA indicated that the scope to move to a less restrictive policy stance had increased. In early September, though, RBA officials hinted that, even though they were cutting the cash rate target by 25bp, assessments of the policy stance going forward would be made on a meeting-by-meeting basis. Clearly, though, things have changed dramatically since then. Indeed, the bottom line is that whatever RBA officials were thinking two weeks ago probably needs to be reviewed extensively, give what has happened in markets and the shifting perceptions of risk.
At this stage, while bearing in mind that things are very fluid, we are sticking with our call that the RBA will wait until December before cutting the cash rate again, according to Walters. This view, however, is predicated, in particular, on the view of our US economists that the Fed probably will not cut the funds rate tomorrow morning (Sydney time), even though the odds of such a move clearly have increased. Our view on the RBA rate call may change if, after all, rapidly evolving developments prompt the Fed to cut the funds rate. The chief J.P.Morgan economist said a clear signal from the Fed, for example, and, perhaps, other central banks, that the downside risks to global growth had increased significantly, could be enough to push the RBA over the line for a 25bp cut on October 7.
Either way, recent financial market turmoil, which has prompted the RBA to inject additional funds into domestic money markets, means the RBA's October policy decision now is a closer call. As we have been arguing for some time, the macro-economic argument in favour of a rate cut in October is not compelling, following last week's run of unexpectedly upbeat domestic economic data. RBA officials, though, may decide that, having already embarked on an easing cycle, an October rate cut could help to at least offset the accumulating downside risks to Australia's growth outlook. We will review our RBA rate call following tomorrow's Fed decision and commentary.
Another key milestone in that regard will be tomorrow's scheduled speech over lunch by RBA Governor Glenn Stevens. The title of the Governor's speech indicates that he planned to discuss four long-run themes. Given what has happened, however, it would be inconceivable for Mr. Stevens to ignore recent market and economic developments. Indeed, we expect the Governor to explicitly refer to the likely impact on the economic and policy outlook of the turmoil in markets, either in his prepared text or in the question and answer session to follow. Therefore, we won't have long to wait after the Fed decision for an update on RBA thinking.
Today's minutes, for what they are worth given what has happened in the intervening fortnight, explained in detail the reasoning for the September rate cut. As expected, the minutes referred to the weakness in domestic demand, triggered by tight financial conditions, the slump in demand for home loans, sliding business and consumer confidence, lower rates of capacity utilization, and softening labour market conditions, which have helped to ease wage pressure. RBA officials also took note of the abrupt decline in the AUD, although this did not seem to be a major consideration for the policy outlook. The minutes also noted the trend towards weaker growth in Australia's trading partners.
One point of interest in the minutes was that RBA officials still were referring to the "opposing forces" at work in the economy - the soaring terms of trade on one side, but slowing domestic demand on the other. In this way, the minutes make clear that the rate cut in September was not a "given". Board members debated the merits of the timing of the first reduction in the cash rate, and balanced the risks of easing too early against the perils of waiting too long. It seems, therefore, that, before the events of the last few days at least, officials were in no rush to ease policy. This is partly because inflation is very likely to rise in coming quarters, and will return to target only "over time".
