Greg Jericho
Chief Economist
The Minutes of the RBA Monetary Policy Board Meeting of 7-8 July are out (you know, the one where they went against all expectations and kept the cash rate at 3.85%).
So what do they say?
The minutes have a very interesting economics chat about the “neutral rate” – this is the point at which they believe the cash rate is neither stimulating growth nor slowing down the economy. I won’t bother with all the nerdy stuff, but suffice to say the board notes that “the current setting of monetary policy was modestly restrictive”. So yes, the RBA decided Australia economy was running so well that is should be slowed down.
What does slow down mean? Well mostly, increasing the number of people unemployed.
There was a bit of discussion about the international economy, but most of it involved wondering about what Trump might do, and realising no one has a bloody clue – including the fact that a fair bit of investors pricing in markets was due to complacency because where tariffs currently are (especially with China) is not as bad as they were threatened to be, and people are forgetting that they are still terrible. Look, it’s a mess – some members then took the view of hey it’s not as bad as we thought, while others were like, yeah but it is still bad!
Their discussion on the domestic economy shows just how absurd was the decision to keep rates steady.
The board noted that while household incomes was up a bit but:
“even with this recovery per capita consumption had been little changed over the prior year. Available indicators for the June quarter suggested that growth in household consumption had been slightly below the staff’s expectations.”
This translates as them acknowledging that people were still doing it tough and not spending as much as the RBA thought they would (and we know when spending falls, employment growth slows and unemployment rises).
The minutes then also reveal how they really got it wrong on unemployment. The RBA board was sure employment would be fine. They knew that non-market (ie the care sector and education) jobs were slowing but that the market sector would take up the slack,
“They observed that the unemployment rate could hold steady even if this transition occurs with somewhat lower overall employment growth, depending on developments in labour force participation.”
Well, a week later the unemployment rate rose 0.2%pts, so no, it was not steady.
The RBA also decided to skylark about productivity: “Members discussed the broad-based slowdown in productivity growth in Australia and other advanced economies.” This is quite dumb, to be honest. Productivity growth is a LONG-TERM issue – it moves slowly and due to many different structural factors. It really should not have anything to do with the RBA deciding whether or not to cut interest rates. If they want to be on the Productivity Commission, I am sure they can apply for a job, but the RBA’s jobs is to deal with monetary policy.
They tried to finagle it into a discussion of rates because they tried to argue that if productivity is so low then maybe the current level of GDP growth is as good as we can do. This is all pretty spurious and lacking any really understanding of the issues of productivity and instead was just being used by the RBA as a reason to not cut rates,
So why did they decide not to cut? Well, the minutes suggest it was all about timing.
“All members agreed that, based on the information currently available, the outlook was for underlying inflation to decline further in year-ended terms, warranting some additional reduction in interest rates over time. The focus at this meeting was on the appropriate timing and extent of further easing, against the backdrop of heightened uncertainty.”
So they agreed rates should be cut, it’s just that the majority decide now was not the right time (presumably they wanted to wait until unemployment increased by 0.2%pts like it did in June?
They then noted that actually when it comes to the “neutral rate” they really don’t know:
“it was difficult to determine with precision how far interest rates needed to fall before monetary policy was no longer restrictive, and so members observed that it might be prudent to lower interest rates cautiously as the required degree of policy restrictiveness declines.”
If this reads like they are basically doing monetary policy based on “the vibe”, then yeah, you are pretty much on the money.
Then comes the conclusion:
“They believed that lowering the cash rate a third time within the space of four meetings would be unlikely to be consistent with the strategy of easing monetary policy in a cautious and gradual manner to achieve the Board’s inflation and full employment objectives.”
A key part is the bit about “full employment objectives” – always remember the RBA believe full employment is a situation where unemployment is around 4.5% – that is their goal. They believe that the number of people employed right now is more than “full employment” – ie we’re “over-full”. And so as a result they want the economy to slow so more people will lose their jobs and thus workers will be less eager to argue for a better wage rise.
A minority of the board (ie 3 people) wanted to cut rates – they “placed more weight on downside risks to the economic outlook – stemming from a likely slowing in growth abroad and from the subdued pace of GDP growth in Australia”.
So 6 thought things were not all that bad, and 3 were like, err have you read the news? Have you looked outside?
And thus by a vote of 6-3 the cash rate was kept at 3.85%.
