No more rate cuts on the horizon

The minutes from the RBA's last board meeting released today suggest that unless something economically serious happens the 125bps worth of cuts since last November will be all for now.

That little upward blip in the value of the Australian dollar today would appear a signal that the markets, having digested the minutes of this month’s Reserve Bank board meeting, aren’t expecting another official rate cut in the near future.

It is apparent from the minutes that the RBA’s board members are comfortable with the current official rate settings while awaiting some shift in economic settings either at home or abroad.

That’s not to say they are complacent. It is obvious they remain concerned about conditions offshore and the brittleness of the eurozone in particular, with the US recovery losing some momentum and activity in Europe again declining. The absence of an escalation of the crisis in Europe was, however, noted, as was the possibility – actually, "a substantial risk’’ – that the crisis could flare up again.

The board may have been slightly premature in interpreting data from China as suggesting growth in its domestic activity might not slow much further. Since the July 3 RBA meeting, of course, the data from China has shown a sharp deterioration in GDP growth and rising signs of concern among the Chinese authorities.

There was a slightly sceptical undertone to the board’s discussion about the domestic economic conditions.

They cited the March quarter national accounts, where GDP growth of 1.3 per cent (4.3 per cent over the year) surprised/shocked the markets and stronger than expected business investment and consumption – and then said consumer and business sentiment and other ‘’timely indicators’’ of activity suggested the economy was likely to grow at a slower rate in the June quarter.

They also referred to the divergence between the resource and non-resource sectors of the economy, where conditions in mining and transport were well above average and conditions in construction, retailing and manufacturing well below average.

While household consumption grew strongly in the year to March the strength in goods consumption was, the minutes record, somewhat at odds with a range of partial indicators and the bank’s own retail liaison. One possibility discussed by the members was that the discounting had increased sales volume but the growth in sales value had been modest – which fits with the both the anecdotal and actual evidence from the bigger retailers.

The housing market remained subdued, activity was likely to remain relatively weak, prices were six per cent lower than in early 2011 and household credit was growing broadly in line with incomes.

In other words, if the March quarter GDP numbers were seen as an aberration, whether statistical or real, nothing much had changed from the June meeting, when the bank cut official rates by 25 basis points.

Given that the RBA has cut the cash rate by 125 basis points since last November, and that monetary policy does take some time to flow through to the economy, there was no basis for another movement in either direction.

Unless something changes – the eurozone imploding, China being unable to slow the deterioration in its growth rate or some decisive shift in the direction of the domestic economy – that’s likely to remain the case for some time.

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