May’s RBA board meeting minutes outline the rationale behind their 50bp reduction of the cash rate. The minutes note that the domestic economy had been growing at a modest rate in early 2012 however, the activity varied across industries. The mining sector remains strong with a number of large projects underway and on the drawing board. The high level of the exchange rate has continued to put pressure on import-competing and exporting firms.
The minutes note that the building, construction and manufacturing sectors were struggling, along with a number of retailers. The residential construction industry came under the spotlight;
Members were briefed on the continued weakness in the housing market generally and residential building activity in particular. Demand for housing finance had eased in the past few months and recent data suggested that dwelling prices had continued to decline, although there were tentative signs that the pace of decline had been more gradual overall in recent months. Despite dwelling prices declining relative to incomes and rises in rental yields, forward-looking indicators implied little prospect of an imminent recovery in housing construction. Information from liaison suggested that households were unwilling to commit to contracts for new dwellings because of concerns about job security and declining dwelling prices.
The march quarter inflation figure came in lower than expected, showing inflation around 2-2.25 per cent on a year-ended basis. The decision was largely based on uncertainty in the international economic and financial environment, as well as evidence suggesting the Australian economy was growing below trend. The minutes also point to rises in banks funding costs.
At previous meetings, the board members had agreed that if slower growth in demand resulted in more moderate inflation, it would strengthen the case for a further easing in monetary policy.
Given recently accumulated information on demand and the rate of inflation, together with the revised forecasts that had been presented, members considered it appropriate for monetary policy to be eased.
The complete RBA May board meeting minutes can be found here