The Board sees increased inflation risks while recognizing prospect of weakening economy. And rising unemployment rate.<\/p>\n
The Minutes from the Reserve Bank Board\u2019s meeting in June provide a more balanced approach to the outlook for rates than we saw in the Governor\u2019s statement following the decision to raise the cash rate by 25 basis points.<\/p>\n
Of some significance is the absence of the sentence, \u201cSome further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable time frame.\u201d<\/p>\n
That sentence was used in both his Statement and in his speech the following day to a bankers\u2019 forum. It seems somewhat strange that the Governor would repeat the sentence on two occasions but the Board chose to exclude it from the Minutes.<\/p>\n
The Minutes did conclude that the Governor\u2019s speech the following day \u201cwould provide an opportunity to explain the decision in more detail.\u201d So we should reasonably conclude that the \u201csome further tightening\u201d is still on the Board\u2019s radar.<\/p>\n
Less surprising is the description of the tightening decision as \u201cfinely balanced\u201d. This is a fairly common description of decisions when we are nearing the end of the tightening cycle.<\/p>\n
The Board considered two options \u2013 raise the cash rate by 25 basis points or hold rates steady.<\/p>\n
The key theme from the Governor\u2019s statement that the balance of risks on inflation had shifted to the upside (compared with a month earlier) was confirmed in the Minutes.<\/p>\n
These direct risks are set out as: the monthly indicator of headline inflation had shifted to the upside in April; the decline in goods prices inflation had been less than observed in other countries; and services price inflation had not yet shown signs of moderating.<\/p>\n
But concerns around wages growth seemed more acute: \u201cthe possibility of implicit indexation. to become widespread\u2026 [while] some members observed that some firms were indexing their prices.\u201d<\/p>\n
In addition the Annual Wage Review decision of the Fair Work Commission was higher than expected . and a range of public sector enterprise agreements were being negotiated and were likely to contain wage rises in excess of 4% for the first year. Concerns were also raised that \u201ca broad range of jobs were to become implicitly indexed to high inflation.\u201d<\/p>\n
There is also specific concern around the housing market with the unexpected resumption of growth in house prices implying less of a drag on spending. Further, the stabilization of housing loan approvals suggested that financial conditions \u201cmay not have been as tight as previously judged\u201d.<\/p>\n
Despite the rate increase in June the Westpac Melbourne Institute Index of House Price Expectations stabilised in June at a very high level, while auction clearance rates have remained high despite a marked lift in turnover. When the Board meets again on July 4 it is likely to be discussing another month of housing buoyancy.<\/p>\n
Conclusion Nevertheless it is curious that the Minutes did not repeat \u201csome further tightening of monetary policy\u2026\u201d while there is clearly concern around household spending.<\/p>\n Since the Board meeting Compensation of Employees was reported to have lifted by a hefty 2.4% in the March quarter; while GDP lifted by a tepid 0.2% \u2013 around expectations.<\/p>\n The May Employment Report with an increase of 76,000 jobs will continue to see concerns at the RBA around a tight labour market raising those issues with respect to higher than acceptable wages growth, especially concerns around indexation. This concern around tight labour markets was emphasised by Deputy Governor Bullock today when she referred to employment being above what is consistent with the inflation target \u2013 more evidence that upside risks to inflation are sustained.<\/p>\n","protected":false},"excerpt":{"rendered":"
\n<\/strong>Westpac expects a follow up rate increase in July. This will be based around the key theme from the Minutes that the risks to achieving the inflation target have increased. It seems unlikely that concerns around indexation; sticky services inflation; and rising house prices will dissipate in one month.<\/p>\n