The minutes of the June Reserve Bank board meeting confirm that interest rates will not move any time soon; not at until some major change in the economy forces it, such as a sharp rise in inflation, or a settling of the unease over Europe and the euro.
But news that Spain is facing a credit freeze might see our rates hold at present levels for a bit longer than expected, the situation with euozone’s 4th biggest economy remains delicately poised (see story below).
As was noted in the post meeting statement on June 1, Europe was a major discussion point at the RBA board meeting. The minutes elaborate on that impression.
"In considering the setting of monetary policy, members noted that the situation in Europe had deteriorated significantly over the previous month.
"Market confidence had been severely eroded, and some governments were now in the very difficult position of having to tighten fiscal policy at a time when growth remained weak.
"Notwithstanding the actions that had been taken by European policymakers and the IMF, the situation remained uncertain.
"The difficulties in Europe would inevitably weigh somewhat on prospects for global growth.
"However, in areas such as Asia where growth had recently been strong, it had become more likely that the withdrawal of policy stimulus would be delayed as a result of the developments in Europe."
That hasn’t changed at all; if anything there’s greater volatility.
We saw a recovery in confidence late last week and overnight nipped by Moody’s downgrading Greece (at long last?) and then those reports of credit concerns in Spain surfaced late in the northern trading day to add new uncertainty to what was already there.
While employment in Australia remains strong, there are areas of weakness that have been obvious in the past one to two months.
Retailing comes to mind and there the RBA minutes said: "Liaison with retailers suggested fairly weak trading conditions more recently, with many retailers noting that significant discounting was occurring. In contrast, purchases of motor vehicles by the household sector had been strong this year".
That is a paradox: the second or third major purchase in a person’s life is a car and people have not cut here, despite the downturn in confidence.
Should this be seen as a case of watch what we do, not what we tell surveys?
Figures out yesterday showed that personal finance commitments fell 0.6% in April, seasonally adjusted, from March to be down for a third straight month.
Total commercial finance was up 5.6% in April, lease finance was down 8.0%, but housing finance for owner occupation rose 0.6%.
These figures confirm the patchiness of the economy (which comes through in the minutes).
"While the international environment facing the Australian economy had become more uncertain, members noted that the medium-term outlook remained positive.
"The prices of Australia’s main commodity exports were still elevated, despite recent falls, and the high level of the terms of trade would add to domestic incomes and demand.
"Most indicators suggested that the economy was continuing to expand and employment growth had been solid.
"Conditions, however, clearly differed across sectors and aggregate spending was still being supported by public demand.
"While recent data for prices and wages suggested that the disinflationary forces in the economy were not quite as strong as previously expected, global events could also have implications for the inflation outlook in the medium term.
"Members noted that the CPI data for the June quarter, which would be released in late July, would provide information on the extent of inflationary pressures in the economy."
Local inflation is the other thing that the bank will be watching. The CPI for the June quarter will be out late next month; a solid rise will see rates up in either August or September, depending on the size. No real change and rates will remain on hold for a while longer.
And one other factor the bank is keeping a close eye on is the Chinese economy. As we observed yesterday and last week, China is travelling quite well at the moment, a sharp fall in housing might see the bank wait a bit longer, even if our inflation is high.
The minutes finished with this statement:
"As a result of actions at previous meetings, policy had moved from the very expansionary settings reached in early 2009 to the point where interest rates paid by borrowers were now around their average levels of the past decade or so.
"Members judged that these previous actions afforded policy the flexibility to await information on how the recent market uncertainty might affect the global economy, as well as news about the outlook for inflation. For the near term, therefore, members judged that it was appropriate to leave the cash rate unchanged."
The RBA has given itself the flexibility to move higher, remain unchanged, or cut, if there’s suddenly a worsening in a major economy overseas, or the global economy darkens.
For all the moaning and groaning about interest rate rises since last October we, alone of all major economies, now have the room to move quickly.
