RBA minutes note the level of the cash rate – Deutsche Bank

According to Adam Boyton, Chief Economist at Deutsche Bank, the final paragraph of the RBA minutes hold an important 'tweak' in their view, specifically, the inclusion of the phrase "and the level of the cash rate".

Key Quotes

“It reads as follows: "Taking account of all the information available, including the updated forecasts, an assessment of the risks affecting these forecasts and the level of the cash rate, the Board judged that holding the stance of policy unchanged would be consistent with sustainable growth in the economy and achieving the inflation target over time."

“That inclusion of "the level of the cash rate" is noteworthy as it implies the hurdle for easing is quite high given how low rates already are.”

“On risks around the inflation forecasts the minutes note elsewhere that: "members noted that the factors that had weighed on inflationary pressures could be more persistent than had been assumed. On the other hand, wage growth could rise more quickly than forecast if labour market conditions were to improve by more than expected, particularly if employees were to demand wage increases to compensate for the period of low wage growth over recent years. Members also noted that the recent pick-up in global inflationary pressures could flow through to domestic inflation by more than expected."

“In our view there is little risk that global inflation pressures stoke Australian core inflation in 2017 (there is, as we have noted in recent research, little direct correlation between core inflation in Australia and the US). We also suspect that wages growth will pick-up only modestly over coming years, while the strength in the AUD could put more downward pressure on core goods prices.”

“So while we remain comfortable with our expectation that core inflation will remain below the RBA's target band over 2017, and that the pick-up in inflation will be more modest than the mid-point of the RBA's published inflation forecasts would imply (and that the Bank pushed out the return of inflation to an implied mid-point of 2.0% in their most recent SMP); the hurdle for further easing over the near-term is considerable.”

“As a result, risks are rising that our expectation of a rate cut this year will not be realized.”