RBA keeps inflation into focus; likely to lower rates in August if inflation weakens

The Reserve Bank of Australia on Tuesday released the minutes of its July board meeting. The minutes had the similar line of the central bank’s recent commentary and did not provide any clear bias to lower official interest rates. However, the central bank has put the base for likely “adjustments” to monetary policy. The minutes stated that the “information on inflationary pressures, the labor market and housing market activity would be available over the following month”.

If the Reserve Bank of Australia were to alter the monetary policy settings, it would be more likely to loosen the policy than to tighten, noted St George Economics in a research note. The recently released labor market report is unlikely to have added considerably to the rate reduction debate. Moreover, housing data is not expected to alter the Australian central bank’s view that conditions would moderate.

This would bring the upcoming inflation data into focus. The inflation data would be the most significant factor of data given the central bank’s target of maintaining inflation between 2 percent and 3 percent in the medium-term and the threat that inflation might keep on missing the RBA’s expectations and its target.

Meanwhile, there were widespread talks about the effect of UK’s vote to exit the European Union. Like the other global policymakers, the Australian central bank noted that it was quite soon to gauge the economic impact of the Brexit vote. But the central bank does not anticipate a considerable effect on the global economy. It stated that the direct impact on the Australian economy is expected to be quite small. Furthermore, the RBA, in its minutes, mentioned that financial markets had been performing quite well in spite of heightened volatility.

However, the central bank stated that there continued to be certain concerns about the economic outlook to trading partners of Australia. Regarding the domestic economy, the central bank continued to give a watchful, but balanced opinion on the outlook.

The RBA still brought some points in focus. It provided a more optimistic assessment on non-mining business investment. According to reports, some parts of the Australian economy have recorded growth in non-mining business investment.

Moreover, the minutes stated that the outlook for investment was quite favorable in certain commercial property sectors such as hotels, retail, aged care and student accommodation. Meanwhile, the RBA is becoming quite vigilant about the Australian labor market’s health. A slight rebound in employment growth is required in order to avert the jobless rate from rising, stated St George Economics.

In all, the Australian central bank appeared satisfied about the transition towards non-resource sector-led growth that is currently well advanced. The Reserve Bank of Australia has noted its concern again regarding the likely strengthening of Australian dollar that might complicate the required economic adjustments.

Overall, the RBA is remaining cautions about the outlook. It continues to be upbeat about the economic transition taking place and is quite optimistic about the non-mining business investment outlook, said St George Economics. However, concerns regarding the labor market condition, the direction of AUD and risks to the global economy remain. The central bank seems to be setting the scenario of a likely easing in monetary policy; however, the key to any alteration would be how the forthcoming data come out.

“We expect a weak inflation outcome would likely convince the RBA to lower official interest rates again and expect the RBA will lower official interest rates by 25 basis points at its August meeting,” added St George Economics.