RBA April board meeting minutes strengthen case for May interest rate cut, and another: Westpac

The minutes of the April RBA board meeting have strengthened the case for a rate cut at the May 1 meeting, according to Westpac.

“We are confident that the RBA will deliver a 0.25% rate cut on May 1," Westpac chief economist Bill Evans suggests, based on his expectations that the underlying first quarter 2012 inflation data, due for release April 24, will be 0.6% for the quarter and 2.3% for the year, down from 2.5% in quarter four in 2011.

Westpac suggests the data could provide the RBA with ample scope to cut rates again in June or July given the sentiment of the minutes particularly in recognising the sharp regional and sectoral differences in the economy and the likely impact of a significant fiscal tightening.

The minutes gave a number of additions to the bank's insights around the current economic environment, the Westpac chief economist notes.

“Firstly, stronger emphasis is given to the divergences between sectors and regions in the economy.

“Whereas the governor referred to ‘differences’ these minutes refer to ‘sharp differences’,” Evans notes.

The analysis of the minutes by Westpac also noted there was recognition that "the level of non-mining investment had been flat over 2011, and recent surveys of business intentions suggested that non-mining investment was likely to remain sluggish for some time".

Noting the RBA members spent some time exploring reasons for the weakness in many of the indicators for housing turnover and building activity, Westpac concluded the minutes did not go so far as to question why there appears to have been only muted response to the recent rate cuts.

“But one can sense some degree of frustration in the likely discussion,” Evans says.

Westpac also suggests the RBA attitude towards the labour market appears to have become more realistic.

“In previous discussions the emphasis has been around the unemployment rate alone whereas the board now points out that "an easing in average hours worked and a decline in the participation rate were indicative of a softer labour market than that implied by the unemployment rate".

Evans was also encouraged to see that the board had made special note of the Westpac-Melbourne Institute index of unemployment expectations by noting that "household concerns regarding future unemployment (were) at their highest level since mid-2009".

“Probably the most surprising aspect of these minutes was the direct comment on fiscal policy,” Evans says.

“The bank specifically points out that economic conditions will be impacted by ‘significant fiscal tightening in the next few years’.

“Despite the government indicating the intention to return the budget to surplus from a deficit of around $40 billion we cannot recall the bank specifically referring to fiscal tightening in previous statements.”

“The message from the governor's statement on April 3 was that there was scope to cut rates as long as the inflation report indicated that inflation pressures remained benign.

“This message has been repeated with the additional dimension of indicating that slower growth could be expected to result in a more moderate inflation outcome.”

Finally, Bill Evans notes there was an extensive discussion at the April RBA board meeting on the funding costs of banks.

“The importance of term deposits to the banks' overall funding profile has been emphasised.

“Recall that the bank has noted that ‘since the middle of 2011 there has been a further increase in banks' funding costs relative to the cash rate of the order of 20-25bps’.”

Westpac notes that the mismatch was explained in terms of the general principle that the RBA cash rate had become a less important influence on the banks' funding costs due to competition for deposits and the increased costs of term funding.