RBA Minutes Disappoint Doves

Dovish commentary from the Reserve Bank of Australia would have crushed any lingering hopes of upcoming rate hikes but that wasn’t the case at all as the minutes indicated rate hikes could come if the CPI reading next week is high.

What sounded like worries about employment and growth in the statement, read more like a simple adjusting of time frames in the minutes. Officials say some weakness is due to production delays and indicate that growth that was expected to be harvested in Q3 and Q4 is still coming, but not until early 2012.

“The delays in the recovery of coal production and supply-chain disruptions resulting from the Japanese earthquake and tsunami also meant that GDP growth through 2011 was unlikely to be as strong as earlier forecast, with some of the recovery being pushed into the early part of 2012.”

Does this change any underlying theme? We don’t think so. The parts of the minutes that deal with domestic growth are as rosy as ever, certainly more upbeat than expected. In particular, the strength of foreign investment, which officials characterized as “very strong” and of growth tied to Asia.

Virtually nothing in the minutes suggests the next move from the RBA will be anything but a hike. The lone exception would be from some type of external shock. “The downside risks associated with a possible adverse European financial shock looked more significant than had been the case a few months ago,” they said.

THE BOTTOM LINE: the minutes should eliminate any further talk about rate cuts this year, baring an external crisis. Instead, the focus will shift to the July 27 reading on Q2 inflation with the possibility of a hike later in the year on a high reading.