The minutes of the November board meeting were released this week and markets took the view they contained no surprises. The conclusion of the minutes was effectively the same as the November Statement on Monetary Policy. After the release, the odds of a December rate cut implied by cash rate markets was unchanged at about 10% while the chances of an August 2016 rate cut decreased from 74% to 62%. 10 year bond yields were largely unchanged by the release and finished 2 bps higher at 2.95%. The immediate reaction of the currency market was to sell the dollar against the greenback but over the next few hours the Aussie retraced and the currency finished little changed over the day.
The key points of the minutes can be summed up as follows:
- The Board thought the global economy was expanding at a moderate pace, with some further softening in conditions in the Asian region, continuing growth in the United States and a recovery in Europe. The slowdown in Asia had been greater than previously expected, which had led to lower commodity prices and a fall in the terms of trade. Monetary policy was accommodative in many economies, the low level of oil prices was expected to support growth over the next few years and inflation rates below central banks’ targets.
- Domestically, moderate economic expansion had continued, mostly via household consumption and housing investment, on the back of the “very low” level of interest rates. The level of the exchange rate had made domestic producers more competitive, especially so in the services sector, which was providing the bulk of jobs growth. Non–mining business conditions surveys over recent months had increased to above-average levels which suggested an improvement in economic conditions was coming.
- The Australian economy was expected to grow gradually over the next two years as falling mining investment waned while the non-mining sector took up the slack. However, the Board noted the spare capacity in the economy which was a function of the relatively high unemployment rate, low wage growth and the lower-than-expected inflation. Spare capacity was expected to “persist for some time” with its consequences for inflation, unemployment and wages growth.
- As a result the Board required monetary policy to remain accommodative and even after taking recent mortgage rate rises into account, the Board still considered conditions to be so. It noted how credit growth was up in recent months, housing prices had risen further, but moderately, in Melbourne and Sydney and mentioned recent supervisory measures “were helping to contain risks.”