Economists found little surprising in the minutes of the RBA’s July meeting. As CBA put it, “The RBA Minutes caused no reaction in a market that had already rallied.” However, a number of economists at the major banks picked up on the attention the RBA is beginning to pay to the nature of employment in Australia. The minutes refer to the underemployment rate and how it had not fallen as much as the unemployment rate. Those who are employed but wish to work more and are available to work more hours are described as being underemployed. It is another measure of spare capacity in the economy.
While noting the RBA’s new (public) interest in this issue, most economists chose to focus on one particular section of the minutes. “The Board noted that further information on inflationary pressures, the labour market and housing market activity would be available over the following month and that the staff would provide an update of their forecasts ahead of the August Statement on Monetary Policy. This information would allow the Board to refine its assessment of the outlook for growth and inflation and to make any adjustment to the stance of policy that may be appropriate.” It is this reference to “further information…over the following month” which has got economists thinking this section of the minutes adds weight to their suspicions regarding the importance of June quarter CPI which is published late this month.
Bill Evans, Westpac chief economist said, “The minutes clearly leave the door open for another rate cut in August. This will depend upon the June quarter inflation report and of course it is not clear what would be the upper bound for this report to ensure a follow up rate cut.” CBA Team economics held a similar view. “[The] RBA minutes confirm it’s all about inflation and the activity data is less relevant from a policy perspective…. So if inflation is low enough in next week’s CPI data the best guess is still a rate cut in August.” Reactions from other banks were quite similar.
Financial markets took little immediate notice of the release, although the local currency was a little weaker, which implies the foreign exchange market thinks the chance of lower future interest rates is higher than before. The yield on Australian 3 year bonds finished the day at 1.45%, down 6bps while 10 year bonds closed at 1.935%, down 7bps. The probability of an August rate cut implied by cash contracts rose from 58% to 64%.
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