The March meeting of the RBA held near the beginning of the month left the overnight cash rate steady at 1.50%, as expected. Historically, RBA meetings in March have been uneventful as rate changes are typically made in February, May, August and November after quarterly CPI figures have been released. However, the minutes from such meetings provide clues with regards to the RBA’s state of mind and where their focus is likely to be in coming months.
The minutes from the March meeting indicated the RBA board focussed on several issues. Most of these issues are positive in the sense they are symptomatic of economic growth both locally and offshore. For instance, the minutes referred to a higher rate of global inflation, improved terms of trade and how September quarter GDP weakness was temporary.
On the other hand, one vaguely negative aspect was a labour market which “remained difficult to assess” and where “spare capacity remained.” Another clearly negative aspect was the reference to the “build-up of risks associated with the housing market.” The last two interest rate cuts appear to have spurred local house price higher and the RBA would be aware of this, leaving them with little inclination to cut rates further for fear of inducing a full-on bubble. As J P Morgan’s Sally Auld put it, “…the explicit commentary on risks around the housing market – against a backdrop in which the soft underbelly to the labour market is becoming more evident – make the case for further macro-prudential regulations more pressing.”
Matthew Hassan, Westpac senior economist, thought the RBA focussed more on the negative than the positive in an overall sense. “Although the central view is still constructive on global and local growth prospects, the commentary placed more emphasis on weaknesses in labour markets and household incomes, tending to downplay the potential boosts from rising commodity prices. The commentary also sounded a touch more urgent around risks in the housing market.”
The release of the minutes had little or no effect on financial markets. Prices in cash markets barely changed, indicating the odds of rate changes in 2017 and 2018 remained largely the same. Yields on 3 year bonds and 10 year bond yields were 1-2bps lower at 2.04% and 2.85%. The full text of the minutes can be found here.