RBA May Minutes: Rising confidence about inflation - ANZ

Jo Masters, Senior Economist at ANZ, explains that not surprisingly, the minutes from the May RBA board meeting were consistent with the May Statement on Monetary Policy (SoMP) as the Bank continues to monitor the labour and housing markets closely, although there was little new information here. 

Key Quotes

“On the economy, growth is still expected to pick-up but there was some discussion about the risks to consumption.”

“On inflation, the minutes revealed that the Q1 CPI data had lifted confidence in the forecast profile, although the discussion warned that wage growth is expected to rise only gradually and the impact of retail competition is broadening.”

“We continue to see the RBA on hold for the foreseeable future.”

“Details

The Minutes from the May RBA Board meeting were – as expected – consistent with the narrative contained in the May SoMP. The focus remains on the labour and housing markets, as well as high household debt. We continue to see the RBA on hold for the foreseeable future. We highlight the following from the Minutes:

• The meeting commenced with a discussion on inflation, with the minutes revealing that the Q1 inflation data “had generally increased confidence in the forecast that underlying inflation would pick up to around 2 per cent by early 2018”. 
• However, underlying inflation is expected to accelerate only “gradually from its current rate”. Indeed, the minutes highlighted that “wage pressures are expected to rise only gradually” and there are signs that retail competition is “affecting a broader range of consumer goods”. 
• Economic data over April has been consistent with an economy continuing to “expand at a moderate pace”, with growth still expected to “pick up to be a little above 3% by the first half of 2018.” However, the minutes warn that “recent data on retail sales growth and households’ perceptions of their personal finances suggested that consumption growth had moderated somewhat in early 2017” and that “The pick-up in non-mining business investment had been modest and forward-looking indicators of investment remained mixed.”
• While consumption is forecast to expand “a bit above its average rate of recent years”, members discussed upside risk should the higher terms of trade be realised and downside risk should house prices fall or households become “more focused on paying down debt”.
• Not surprisingly, the Board continues to monitor developments in the labour and housing markets closely. 
• The minutes acknowledged that the “unemployment rate had edged slightly higher in recent months” but it is still expected to decline gradually over the forecast period. However, the Board noted that should an increase in demand initially be met by increasing hours worked this would “reduce measures of underemployment but represent an upside risk to the unemployment rate forecasts”.
• There was a lengthy discussion about the changing composition of employment, with the minutes noting that “data from the Household, Income and Labour Dynamics in Australia Survey suggested that the majority of part-time workers worked part-time as a matter of choice“.
• On housing, the Board noted that “housing credit growth had steadied in early 2017” and repeated that it was still too early to assess the impact of recent mortgage rate increases and macro prudential policies.