Parsing the RBA

The RBA released the minutes of their August 5th meeting today. Below are some of the pertinent points:

Members considered the information provided by the regular monthly data releases, covering household consumption, the housing and business sectors, the labour market, and trade and commodity prices.

They observed that consumption spending had weakened considerably in 2008, with retail sales being essentially flat in value terms over the first half of the year. In volume terms, retail spending had fallen in this period, with both large and small retailers exhibiting weaker trends in sales.

The phrase weakened considerably was noteworthy as previously the RBA had only alluded to a "slowing" in consumer spending.

Given there had been a significant change in borrowing behaviour, confidence was weaker, asset prices had declined and slower overall growth was in prospect, tighter financial conditions were not warranted. Indeed, less restrictive conditions could soon be called for, otherwise the risk of a deeper and more persistent slowing in the economy would increase. On these considerations, a case could be made for an early reduction in the cash rate.

Weighing up all these considerations, members judged that the current stance of policy was appropriate for the time being. Nonetheless, given the slower trend in demand, scope to move towards a less restrictive setting of monetary policy was judged to be increasing.

That the RBA has moved to an easing bias is not news but whether they begin cutting next month or at some later date is unclear. Also unclear is whether the major banks will follow the RBA cuts.

I have a feeling that the banks will at least follow the first few moves by the RBA, however if the RBA cuts aggressively over the next 12 months, tight credit market conditions will make it all but impossible for the banks to follow.