Reserve Bank remains cautious on rates

The minutes of the RBA’s latest board meeting have offered little insight into the future direction of interest rates.

The RBA has stopped short of introducing a clear bias to further lower interest rates. Pic: AFP

The minutes of the Reserve Bank’s latest board meeting have offered little insight into the future direction of interest rates, allowing the Australian dollar to consolidate its recent gains.

Today’s minutes release comes two weeks after the RBA left rates on hold at a record low 1.75 per cent.

Investors had been surprised the June meeting didn’t formally outline an easing bias, with bets on rate cuts pared back and the Australian dollar rising on the development.

The RBA today again offered no hint of further cuts in the broader minutes release, despite most economists tipping a further move in August once June quarter inflation numbers have been published.

Instead of delineating an easing bias, the central bank focussed on better-than-expected local growth, a hint it is in no rush to follow-up May’s rate cut with another.

“Recent data on the domestic economy had generally been positive,” the RBA said.

“GDP growth had picked up in the March quarter to be about half a percentage point stronger than expected. Growth over the year had increased to be a bit above estimates of potential growth, reflecting a stronger expansion in non-mining activity.”

Futures markets reacted quickly to the publication, with the chances of a rate reduction in July slashed by three percentage points to 22.8 per cent.

The market is also now pricing in just a 37.9 per cent chance of a move in August, down from 42.2 per cent this morning and above 50 per cent last month.

At the heart of the chances are inflation data due out on July 27, with a lowball number potentially forcing the RBA’s hand.

In the meantime, the central bank has seen nothing to alter its most recent forecasts on inflation, with wage pressures considered key to returning inflation to trend.

“While the latest suite of data had confirmed that labour cost pressures remained subdued in the March quarter, a few of the wage measures were slightly more positive. Nevertheless, inflation was expected to remain low for some time,” the minutes read.

Ahead of its May move the RBA had been cautious on cutting rates due to the risk of stoking a house price bubble. It had seen threats from rising prices abate prior to May before a recent, sudden uptick in valuations.

If the pricing pressure continues the central bank is likely to be wary of cutting again, but it’s unconvinced the recent bounce is sustainable given signs of rising supply, particularly in the apartments space.

“Housing prices had begun to rise again recently, particularly in Sydney and Melbourne,” the RBA said.

“The extent of future rises, however, was likely to be affected by the considerable supply of apartments scheduled to come on stream over the next couple of years.”

Analysts were wary on reading too much into the update, with Westpac senior economist Matthew Hassan saying the big four bank had not altered its outlook as a result of the release.

“While the minutes provide more colour around the June policy decision they do not offer any more guidance than the governor’s decision statement,” he said.

“We expect no change in either the cash rate or the RBA’s rhetoric [in July].

“However, it remains our assessment that the June quarter inflation read will reconfirm to the board that, on a ‘no policy change’ basis, inflation is unlikely to return to the bank’s 2-3 per cent target over the forecast horizon and that another 25 basis point cut is necessary with that cut being delivered at the board’s meeting on August 2.”

At 11.45am (AEST), the Australian dollar traded at US74.79c, up from US74.69c just prior to the release.