Bill Evans, analyst at Westpac, points out that the Minutes of the August meeting the Reserve Bank Board of Australia has identified both global and domestic risks as relevant for policy.

Key Quotes

“The minutes of the Reserve Bank Board meeting for August have provided one significant surprise.”

“In both the Governor’s decision statement following the meeting and the Statement on Monetary Policy (similar version), the conclusion included “the Board would continue to monitor developments in the labour market closely and adjust monetary policy if needed to support sustainable growth in the economy and the achievement of the inflation target over time”. In these minutes, the emphasis has changed to the following “the Board judged it appropriate to assess developments in the global and domestic economies before considering further change in the setting of monetary policy. Members would consider a further easing of monetary policy if the accumulation of additional evidence suggests this was needed to support sustainable growth in the economy and the achievement of the inflation target over time”.”

“So the message here is that policy could be eased in response to an unexpected deterioration in the global economy without the labour market providing an adequate justification for a rate cut.”

“Conclusion

We do not think that after emphasising the labour market as the key factor for policy in the May, June and July minutes, the importance of the labour is in any way diluted. However, as a small open economy, a responsible central bank could not be seen to dissociate policy from global developments given the alarming signals around the world economy.

It is also important to be clear that the forecasts in the Statement on Monetary Policy, on which these minutes are based, assume market pricing for the cash rate path. At the time of the forecasts, the market pricing discounted two further rate cuts — one by the “end of this year”, and a second in the “first half of 2020”. Despite this rate path, the forecasts indicate a lower profile for wages growth (reaching only 2.4% in 2021), an increase in the unemployment rate forecast (from 5% to 5.2% in December 2020), and the trimmed inflation rate forecast now below 2% by end 2020 (at 1.9%). These forecasts indicate that despite two more rate cuts, the RBA still does not expect the unemployment rate to go remotely close to its stated desired 4.5% over the forecast horizon, or reach the 2-3% target band for inflation before 2021.

Consequently, we remain comfortable with our forecast that the RBA will next cut the cash rate in October by 25bps and wait until early 2020 (February) for the second cut of 25bps.”