Bill Evans, Chief Economist at Westpac, explains that the minutes of the May monetary policy meeting of the Reserve Bank Board repeated the assertion that first appeared in the April minutes which is that “members agreed that it was more likely that the next move in the cash rate would be up rather than down”.
“This observation is contingent on the economy evolving in the way the Bank currently expects which is “a gradual pick-up in inflation as spare capacity in the economy is absorbed and wages growth gradually picks up”. Nevertheless the Board observed that spare capacity in the labour market would remain for some time.”
“Using this terminology might create challenges for the Bank in the future. If the term is ever deleted from the minutes, markets are likely to take that as a sign that the Bank’s policy stance has changed.”
“There remains the concern that wage pressures may take some time to emerge. Indeed Deputy Governor Debelle highlighted a key risk to the Bank’s outlook in his speech on May 15. He nominated that risk as being that the level of the unemployment rate needed to spark wage and inflation pressures might be lower than the Bank’s current unemployment forecast. Note that this is a fairly cautious 5.25% (from current 5.6%) by June 2019 and remaining there through to the end of the forecast period by June 2020.”
“There may be some source of embarrassment in the minutes in that it is noted that “recent data on retail” suggested that momentum had continued in early 2018. Since the Board meeting, the retail sales report showed that real retail sales had grown by a very modest 0.2% in the March quarter.”
“This downbeat take on the consumer was further supported by the Westpac Melbourne Institute Index of Consumer Sentiment. The May Report showed a further modest deterioration.”
“This followed the well-received Commonwealth Budget which included personal tax cuts; savings largely explained by tighter scrutiny of the black economy (few specific losers) and an improved fiscal position.”
“Westpac continues to expect that the Bank’s policy of “stability and confidence” (rates on hold) will be maintained throughout 2018 and 2019.”