Analysis of today's RBA board minutes suggests that the central bank never considered another "super-sized" 50 basis point cut in June (as forecast by several folks and seriously countenanced by financial markets). The choice was a "finely balanced" one between no move at all and a 25 basis point cut for insurance purposes. Even very bearish houses like Westpac acknowledge that the RBA concluded there was not much basis for a cut in June on the grounds of the domestic economy's performance. This is comforting for me personally, as regular readers will recall that I was very much torn between no move and a 25 basis point reduction. Virtually all analysts have surmised that the RBA's June cut was "insurance" against adverse future outcomes without having the benefit of knowing what impact the preceding 100 basis points worth of cuts was having on the economy. In this context, the record shows that the RBA cut in December for insurance reasons, noting there was no case to do so on a domestic basis. The RBA also says it cut by a super-sized 50 points in May mainly to preserve the December reduction. That is, May was targeted at preserving a previous move motivated by the fuzzy, subjective view that something bad could happen in the future. Again, in June, we see the RBA making exactly the same argument: this was another relaxation of monetary policy rationalised in anticipation of bad things happening that have yet to transpire...
Westpac:
The Minutes to the Board meeting of June 5, which resulted in a 25bps cut in the policy rate to 3.50%, imply very strongly that a large cut was not countenanced, and that if the decision was being made solely on domestic grounds, a cut would not have been delivered. The rationale seems to have been that there were enough elements of resilience in the domestic figures for the Bank to take some time to assess the impact of past easing on activity, but that with the potential for global tensions to “intensify” precautionary behaviour, the “finely balanced” arguments turned in favour of a cut.
HSBC:
Today’s minutes reiterated that the 25bp cut in June was insurance against the possible effect of weakening global conditions, which was afforded because inflation is expected to remain low. In their view, local conditions had not significantly weakened.
They also told us that the RBA viewed the decision to cut rates on 5 June as ‘finely balanced’.
We agree. As we noted before the meeting, our view was that local conditions did not warrant a further cut in interest rates. The minutes seem to suggest that on local conditions alone, they would probably have left rates steady. But, the cut was in response to weakening global conditions.
ANZ:
The Minutes of the RBA’s June Board meeting noted that the arguments were ‘finely balanced’ between a modest rate cut and no change in policy...
Combined with recent comments by Governor Stevens, the Minutes suggest that the RBA is not in a particular hurry to ease policy further...
Notably, the Minutes highlight that there had not been time to assess the effects of earlier reductions in the cash rate and that the cumulative easing to date will provide ‘a measure of stimulus…to the domestic economy over the coming months’.
