RBA minutes less dovish than expected, follow up move unlikely before August

Minutes of the RBA meeting held on May 5th released earlier today did not provide any significant additional insights relative to the more comprehensive Statement on Monetary Policy. The point worth noting was the closeness of the decision to cut the overnight cash rate. Minutes revealed that "members discussed the merits of leaving interest rates on hold but decided on balance that a cut would help return inflation to target over time.

Structural changes in Australia away from the mining sector are progressing. Expansionary monetary policy and the weak currency fuelled domestic consumption and industries outside the mining sector. Labour market recovery that started in mid-2015 continues, the unemployment rate fell from 6.3% in early 2015 to 5.7% recently. The RBA in its minutes reiterated its faith in the underlying strength of the Australian economy, and its ongoing rebalancing away from resource-related infrastructure investment.

"With reasonable prospects for ongoing above-trend growth we expect that the Bank will be satisfied that its next rate cut in August will provide further support for its current forecast that underlying inflation will be back near the bottom of the target zone in 2017." said Bill Evans at Westpac.

That said, the Australian Bureau of Statistics in April reported that the consumer price index contracted 0.2 per cent in Q1, the first sign of deflation in seven years. After massive downgrades to inflation forecasts in the SoMP, minutes also emphasised the central bank’s scepticism regarding the outlook of inflation and its worries about the impact of lower inflation on wages growth. It noted that “if inflation was to be persistently lower than previously forecast, it was possible that, in time, this could be reflected in lower wage growth”. 

Markets currently pricing out RBA rate cuts post publication of minutes, expect a potential more cautious approach towards cutting rates again. The chance of a June rate cut post minutes is close to zero and probability of a July rate cut is also very low. The degree of the lowering of inflation outlook in the SoMP implies that the central bank is expected to further ease policy. 

Despite the softer tone of Tuesday's minutes, Capital Economics' economist for Australia Paul Dales says another cash rate cut is almost certain. He said the language around the first cut of the current cycle, in February last year, was similar - and then the RBA eased again in May.

Australian dollar soared after central bank minutes reduced expectations of an interest rate cut. AUD/USD spiked past the 0.73 handle to hit highs of 0.7366 and was trading at 0.7324 at 1100 GMT. Australia's benchmark S&P/ASX 200 index edged lower on the release of the central bank’s minutes, but closed up 0.67 pct at 5,394.70 points.