RBA minutes less hawkish may be providing some support for...

RBA minutes less hawkish may be providing some support for financials.



RBA less hawkish, but still concerned about inflation

Macroeconomic implications

The RBA Board continued to express concern over the strength in domestic demand (supported by the strength in employment and rising incomes) and supply constraints (lack of labour and high capacity utilisation) putting upward pressure on inflation and wages growth. A concern for board members was that inflationary expectations might influence future wage outcomes. The RBA also highlighted that inflation is expected to exceed 4% in the short-term and that their forecast of inflation returning to slightly below 3% in the medium term was premised on "demand slowing sufficiently to slow capacity pressures in the economy." On this, the RBA stated that there was already some tentative evidence that a slowing in private demand was starting to emerge in response to the tighter conditions but its extent remains to be seen. They again highlighted that credit and monetary conditions have tightened substantially this year.

The RBA meeting minutes also confirmed that the malaise in credit markets and an expected slowing in global growth was influential in the central bank adopting a less hawkish tone in its March interest rate announcement. While the picture is unclear, the RBA is of the view that global activity is slowing and concedes financial market conditions have deteriorated. The Bank expects that growth in the world economy is likely to be below trend in 2008 and 2009, but rising commodity prices are expected to boost Australia's terms of trade, thereby boosting domestic incomes.

Financial Market Implications

While the RBA retains its tightening bias, they appear to be less hawkish with the RBA Board judging that the setting of the cash rate at 7.25% "would leave adequate flexibility to respond as necessary over the months ahead to new information about the prospects for economic activity and inflation". Credit (and financial) market conditions will be monitored closely by the RBA and will be influential in the RBA's decision to raise the cash rate further.