By Rudi Filapek-Vandyck

The Reserve Bank of Australia today released the Board Minutes that accompanied the decision to stick with the status quo on the official cash rate earlier this month. No surprise, today's Minutes reinforce the message that a rate cut in May may well be on the cards, but it is not 100% guaranteed. Economists, in response to the public release of the Minutes, point out the local bond market has pretty much priced in a 25bp rate cut in May, plus three more rate cuts by 2013.

Economists at Westpac believe "the minutes of the April 3 RBA Board meeting have strengthened the case for a rate cut at the May 1 meeting relative to the Governor's statement following the April 3 meeting". Their colleagues at CBA simply respond by stating "We expect a cut of 0.25% to 4.0%, the lowest rate since March 2010".

So now it all seems to come down to next Tuesday's publication of March quarter CPI data in Australia. CBA does note, however, "the RBA does appear to have added an extra rider to this conclusion. Not only does QI inflation have to be well behaved but the inflation outlook has to be "more moderate" as well."

An unexpected extra barrier in the run up to the next meeting in early May? Not really, because CBA is anticipating the RBA is downgrading its projections for GDP growth for the year at this very moment. Lower growth should lead to lower consumer price inflation, thus problem solved. The overall odds thus remain very much in favour of the long awaited rate cut in May.

Time to focus on what comes next? Here CBA economists are less sanguine. They suggest for the RBA to add more rate cuts this year, the local labour market needs to weaken more. Note the economists: "At this stage the jobs market is holding up reasonably well. The unemployment rate is still at 5.2%. Job losses in manufacturing, tourism and retail are being offset by job gains in household services areas like health and education." Translation: this doesn't look supportive of further rate cuts.

However, things may not be that simple with Westpac economists taking the view the April meeting Board Minutes suggest the RBA's attitude towards the labour market "appears to have become more realistic". Notes Westpac: In previous discussions the emphasis has been around the unemployment rate alone whereas the board now points out that "an easing in average hours worked and a decline in the participation rate were indicative of a softer labour market than that implied by the unemployment rate". The economists were also encouraged to see the Board had made special note of the Westpac-MI index of unemployment expectations by noting that "household concerns regarding future unemployment (were) at their highest level since mid 2009."

The implicit acknowledgment that the stubborn 5.2% unemployment rate in Australia may not reflect the true story about the domestic labour market is only one of a few changes compared with Glenn Stevens' statement on April 3, point out Westpac economists.

Westpac: "There are a number of additions to the Bank's insights around the current economic environment. Firstly, stronger emphasis is given to the divergences between sectors and regions in the economy. Whereas the Governor referred to "differences" these minutes refer to "sharp differences". There is recognition that "the level of non-mining investment had been flat over 2011 and recent surveys of business intentions suggested that non-mining investment was likely to remain sluggish for some time." The members also "spent some time exploring reasons for the weakness in many of the indicators for housing turnover and building activity". One explanation was the sensitivity of developers to the outlook for prices, while auction clearance rates were described as being below average levels. The minutes do not go so far as to question why there appears to have been only muted response to the recent rate cuts but one can sense some degree of frustration in the likely discussion."

But, continue Westpac economists, "probably the most surprising aspect of these minutes was the direct comment on fiscal policy. The Bank specifically points out that economic conditions will be impacted by "significant fiscal tightening in the next few years". Despite the government indicating the intention to return the Budget to surplus from a deficit of around $40bn we cannot recall the Bank specifically referring to fiscal tightening in previous statements."

Overall, Westpac economists are confident the RBA will deliver a 0.25% rate cut on May 1. Westpac's current forecast is that this cut will be shortly followed by a second move in June/July. The economists believe the sentiment of today's minutes particularly in recognizing the sharp regional and sectoral differences in the economy and the likely impact of a significant fiscal tightening support the view that next month won't remain the only rate cut this year.

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