The RBA released its December meeting minutes early in the session, at which the bank elected to cut the official cash rate (OCR) by 25 bps. The decision to lower interest rates to their lowest level since the mayhem of the financial crisis was a very close call, with the board discussing the possibility of waiting for further information, most notably employment and GDP data released in the days following the RBA’s policy meeting, with labour data mixed and GDP figures printed just below expectations. On balance, however, the RBA saw need to support demand.

Weakness in Australia’s main support strut underpinned the RBA’s decision

An anticipated peak in resource sector investment and a subdued short-term outlook for non-resource investment underpinned the RBA’s decision to loosen monetary policy. This idea gained momentum a week before the bank’s December meeting, with the release of a capital expenditure survey which showed a 3% drop in spending plans for the 2013 fiscal year. Overall, the bank is acutely aware that the hole left by weakness in the mining sector is not being filled by other parts of the economy. When combined with a generally softening labour market that should keep inflation in check, it provided the RBA with scope to lob 25 bps of the OCR.

Another cut in Q1 2013?

Looking ahead, the bank didn’t provide much guidance in the minutes as to future monetary policy decisions, which was enough to suggest to the market that the bank may not be thinking of cutting the OCR in February. Futures markets immediately started to price in less of a chance of a February cut, with the probability now standing at around 59%, as opposed to around 64% before the minutes.

The bank appears to be largely satisfied with conditions offshore, although it did raise concern about the impeding US fiscal and continued economic contraction in Europe. Overall, the bank’s somewhat impassive stance on the global growth story and the drop in the local employment rate in December support the case for unchanged rates early next year. However, we think the labour market is still soft, highlighted by a drop in the participation rate and a lack of people getting full-time work, and non-mining sectors of the economy aren’t going to be able to make-up for a predicted drop in resource investment next year. Hence, we think there is scope for another rate cut in the first quarter of 2013.

The Aussie

AUD was jumpy following the release of the meeting minutes, with AUDUSD initially sinking around 20 pips, before pushing higher shortly thereafter. Overall, price action in the aussie matched that in the futures market, with AUD broadly pushing higher in the wake of the minutes.