Despite claims by some economists that the RBA will lift rates at its May meeting, don’t bet on it (see story above).
A reading of the March 4 minutes shows concern about inflation and growth, but we knew that and it shows a recognition that interest rates have already risen a lot here, while financial conditions overseas are volatile.
When you read through you will get a sense of how much information the board members get each month, the complexity of the issues and the importance of language and nuance in the most important part: the bit at the end under Considerations for Monetary Policy:
We won’t publish these every time, but the minutes of this month’s meeting are important because there is a definite relaxation of the hawkish approach to inflation and rates: the RBA is giving itself some leeway to move, either up or down.
Here’s what the board said on the Australian economy, interest rates and the reasons for the 0.25% lift in the cash rate.
Domestic Economic Conditions
Before reviewing developments in the domestic economy, members noted that the national accounts for the December quarter were to be released the next day.
They were briefed on the Bank’s assessment that the data published so far on the main expenditure and income components suggested growth in GDP could be around ½ per cent in the quarter and around 3½ per cent over the year, assuming no revisions.
Domestic demand was expected to have increased by over 5 per cent through the year. Data released during the meeting, showing that net external trade had subtracted significantly from growth in the December quarter, along with strong growth in public demand, were not regarded as having a material net effect on the forecast for output growth in the quarter.
Members then turned to their review of recent developments in the domestic economy and considered the information provided by the run of regular data releases, covering household consumption, the housing, business and external sectors, and the labour market and wages.
Retail sales had increased rapidly over the course of 2007. The data for January, which were released during the meeting, indicated that sales were flat in the month, though they had grown strongly over the past year.
Strong growth in household disposable income, which was around 8 per cent in real terms over the year to the September quarter, had underpinned growth in consumption. Industry sources suggested that conditions in the retail sector had been mixed during February.
Members noted that consumer sentiment had fallen in recent months and was now below average, though sentiment had not always been a reliable indicator of short-term movements in consumption.
Discussion then turned to developments in the housing sector. Housing construction was seen as providing a source of future growth in activity, as the current level of commencements was running well below estimates of underlying requirements, based on population growth and household formation, and vacancy rates were at record lows.
Although the sharp fall in building approvals in December had unwound the previously apparent growth in approvals, members recognised that this might have reflected data volatility. They were informed that the Bank’s liaison with builders indicated that conditions were not as weak as suggested by the December building approvals figures.
In the secondary housing market, house prices had increased relatively strongly on a nationwide basis over the course of 2007. However, growth in house prices in Perth had ceased, after prices had reached a high level, and house prices in some outer suburbs of Sydney continued to be weak.
In the main auction markets of Sydney and Melbourne, which reflect sales activity at the upper end of the market, conditions had softened in February. Auction clearance rates had fallen noticeably in both cities, and were now a little below average in Sydney and about average in Melbourne, having been close to peak levels in that city in mid 2007.
Demand for housing finance was now easing somewhat, with the monthly rate of growth of housing credit having fallen from around 1 per cent in mid 2007 to around 0.8 per cent, on average, in the past several months.
This was at the lower end of the range over the past decade. Loan approvals as a share of credit outstanding had also fallen since mid 2007.
In the business sector, members observed that the NAB survey for the month of January showed a divergence between business conditions and business confidence.
The business conditions index, which reflected activity and sales, had remained well above average levels, though it had flattened out, while business confidence fell sharply and was now below average. The latter was a more subjective indicator, and the latest movement most likely reflected global financial problems and tighter financial conditions domestically.
The Sensis survey of small and medium businesses continued to show that these businesses were more concerned about finding quality staff than a lack of work or sales.
Businesses planned to increase investment in the year ahead, according to the latest capital expenditure survey, and business credit growth had risen steadily over the past 12 months, to about 24 per cent per annum. Part of this increase reflected the process of reintermediation as capital market funding for businesses had dried up for all but the largest companies. But total provision of credit to the business sector had nevertheless accelerated.
Turning to the external sector, members were informed that import volumes were estimated to have increased strongly in the December quarter and over the course of 2007. The increases were associated with the rapid growth in domestic demand, as well as owing something to the higher exchange rate.
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