At its meeting today, the Board decided to leave the cash rate unchanged at 2.5 per cent.
Growth in the global economy is continuing at a moderate pace. China's growth remains generally in line with policymakers' objectives, with weakening property markets a challenge in the near term. Commodity prices in historical terms remain high, but some of those important to Australia have declined this year.
Financial conditions overall remain very accommodative. Long-term interest rates and risk spreads remain very low. Volatility in many financial prices is currently unusually low. Markets appear to be attaching a very low probability to any rise in global interest rates or other adverse event over the period ahead.
In Australia, the most recent survey data indicate gradually improving business conditions and some recovery in household sentiment after a weaker period around mid year, suggesting moderate growth in the economy is occurring. Resources sector investment spending is starting to decline significantly. Investment intentions in some other sectors continue to improve, though these areas of capital spending are expected to see only moderate growth in the near term. Public spending is scheduled to be subdued. Overall, the Bank still expects growth to be a little below trend over the year ahead.
The recorded rate of unemployment has increased recently, despite some improvement in most other indicators for the labour market this year. The Bank's assessment remains that the labour market has a degree of spare capacity and that it will probably be some time yet before unemployment declines consistently. Growth in wages has declined noticeably and is expected to remain relatively modest over the period ahead, which should keep inflation consistent with the target even with lower levels of the exchange rate.
Monetary policy remains accommodative. Interest rates are very low and have continued to edge lower over recent months as competition to lend has increased. Investors continue to look for higher returns in response to low rates on safe instruments. Credit growth has picked up a little, including most recently to businesses. The increase in dwelling prices continues. The exchange rate, on the other hand, remains above most estimates of its fundamental value, particularly given the declines in key commodity prices. It is offering less assistance than would normally be expected in achieving balanced growth in the economy.
Looking ahead, continued accommodative monetary policy should provide support to demand and help growth to strengthen over time. Inflation is expected to be consistent with the 2–3 per cent target over the next two years.
In the Board's judgement, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target. On present indications, the most prudent course is likely to be a period of stability in interest rates.
The Reserve Bank of Australia on Tuesday kept interest rates on hold at 2.5 per cent, as it again noted slack in the job market and rising house prices, while introducing concerns about the Chinese property market.
The cash rate has been at that level since August last year, and the RBA looks unlikely to change it for some time.
Governor Glenn Stevens ended his monthly statement by again referring to a "period of stability in interest rates".
Noting again that global growth is continuing at a moderate pace, the RBA governor said: "China's growth remains generally in line with policymakers' objectives, with weakening property markets a challenge in the near term."
For Australia, he noted "gradually improving business conditions and some recovery in household sentiment after a weaker period around mid year".
After reiterating that resource investment was declining sharply, he said "investment intentions in some other sectors continue to improve, though these areas of capital spending are expected to see only moderate growth in the near term".
Despite the softer labour market, the RBA noted dwelling prices continued to rise.
The decision to hold, which was universally expected, came on a mixed day for the Australian economy, with stronger-than-expected government spending offsetting a larger-than-anticipated drag on gross domestic product by net exports. Some banks have revised up their estimates for June-quarter GDP growth, released on Wednesday, with the range now widening out to between 0 and 0.6 per cent from 0 to 0.4 per cent previously.
"A 0.6 per cent quarter-on-quarter gain in GDP would be a particularly good result given it follows a strong 1.1 per cent gain in the first quarter and would leave six month annualised GDP growth at a strong 3.4 per cent," ANZ said in a note.
"While this is an encouraging result given the headwinds the economy is currently facing, we would caution at reading too much into it - that is, the drag from the wind-down in mining investment still has a long way to run and is likely to be much larger over coming quarters.
The Australian dollar also sold off as traders began taking positions in the US greenback. It was down nearly US0.4 cents at US92.96 cents after the RBA decision.
The Reserve Bank's decision to keep interest rates on hold at its first board meeting in spring spells good news for home buyers in the busy selling season.
As widely expected, the official cash rate remains at 2.5 per cent, which marks the 13th consecutive month since the last cut by the Reserve.
In a statement issued by the RBA, governor Glenn Stevens has reiterated that the cash rate is likely to remain unchanged for some time.
But it is not all good news with the Reserve Bank citing concerns over China's weakening property market.
Mr Stevens referred to it as "a challenge in the near term".
Even so, LJ Hooker chief executive Grant Harrod believes stable low interest rates will continue to fuel the Australian market heading into spring, and give buyers more confidence to make a transaction.
"Certainly in the last couple of months, we've been in a situation where there's been insufficient stock to meet the level of buyer interest," he said.
"We should start to see more stock come into the market, which will then address the buyer interest that's out there."
Raine & Horne chief executive Angus Raine believes this spring will be even stronger than last year. "Our agents are screaming for more property on the market," he said.
"I believe this [decision] will encourage people who may have been considering selling for a number of years to actually put their property on the market."
Ray White chairman Brian White said continued low interest rates would be good news for buyers and sellers.
"The forthcoming spring season is as good as I've seen for quite a number of years," he said.
"Our offices have been reporting some very strong listings that would be marketed in spring.
"A lot of these listings have been created because people have already bought and are now selling the home they no longer need."
Domain Group senior economist Andrew Wilson said low interest rates had been an important factor in activating housing markets over the past two years. He believes rates will remain on hold for the remainder of this year.
"We've seen housing markets picking up over the past month; higher clearance rates in Sydney and Melbourne over winter. So the signs are still there that it's quite an active housing market going forward," he said.
AMP Capital chief economist Shane Oliver believes the low rates would also help to prop up the market in spring. He does not expect a rise until June next year.
As expected the Reserve Bank Board decided to leave the cash rate unchanged at 2.50%.
In the Governor’s statement he retained the key sentence “on present indications, the most prudent course is likely to be a period of stability in interest rates”.
Surprisingly they changed the wording around the Australian dollar although the sentiment remains the same. Instead of describing the AUD as “high by historical standards” it is now described as “remains above most estimates of its fundamental value”. This description sits better with those of us who have observed the sharp fall in iron ore and coal prices while the AUD has risen. However it does not appear that the change in language has any implications for the policy outlook.
The economic data that appeared to impress the Bank the most over the last month and therefore triggered a change in wording from the August statement was around business and consumer sentiment. The Westpac-MI Consumer Sentiment Index rose 3.8% in August while the NAB business conditions index reached its highest level since March 2010. Those prints prompted “The most recent survey data indicate gradually improving business conditions and some recovery in household sentiment”.
The ABS survey of investment intentions (Capex survey) also provided some encouragement for the Bank for non mining investment. In August it noted “signs of improvement in investment intentions in some sectors are emerging”, whereas today’s note states “Investment intentions in some other sectors continue to improve”. Of course both statements refer to investment in the resources sector “starting to decline significantly”.
It was interesting that the Bank implied a degree of scepticism around the jump in the unemployment rate from 6.0% to 6.4% given that it points out “some improvement in most other indicators for the labour market”. However it points to the labour market continuing to have “a degree of spare capacity” and repeats that “it will probably be some time yet before unemployment declines consistently”. Note that in the August Statement on Monetary Policy the Bank lowered its growth forecast for 2015 and pushed back the forecast timing of a consistent fall in the unemployment rate from 2015 H2 to 2016 H1.
The Bank notes that interest rates have continued to edge lower in recent months as competition to lend has increased. That signals to the market that competition has in a way done the Bank’s job by further easing monetary policy without the need to cut the cash rate. This development makes it even harder for forecasters to expect another rate cut.
Conclusion
As expected there is nothing significant in this statement to motivate us to change our forecast that the next move in rates will be up but not for at least a year. Our official forecast is for a 25bp increase in the cash rate at the Board meeting in August next year. The statement continues to emphasise the significant decline in mining investment; spare capacity in the labour market; moderate economic growth ; a noticeable decline in the growth of wages and an overvalued AUD. All of these factors point to no urgency to raise rates while improving business and consumer confidence; increasing credit growth; rising dwelling prices; and market driven rate cuts also eliminate any need for the Bank to cut the cash rate.
The cash rate remained at 2.5 per cent in September -- the twelfth consecutive meeting without a rate move -- and the Reserve Bank of Australia has again signalled a period of stability. Yet with each passing month there is mounting evidence that the Australian economy is not rebalancing as quickly or successfully as the RBA believes.
Its faith is increasingly misplaced and its belief that the economy will simply return towards trend is little more than wishful thinking. The Australian economy continues to face a number of headwinds -- which if anything have exacerbated since this time last month -- and it remains unclear whether the non-mining sector is capable of rebounding sufficiently.
The two biggest changes since the RBA met in August were the sharp rise in the unemployment rate -- which until we get the August data should be interpreted with some caution -- and the capex data, which showed that business investment is set to decline by almost 10 per cent in the 2014-15 financial year.
Whatever momentum the economy had to begin this year with has largely washed away. The household sector is stretched by poor wage growth and a soft labour market and the fear that the federal government might pass its draconian welfare reforms. I wonder to what extent the recovery of consumer sentiment is due to the federal government’s inability to get key budget reforms through the Senate?
The mining sector has been smashed by a 15 per cent fall in commodity prices since the beginning of the year, weighing on margins and profitability and causing the RBA to note that “at current prices, there is a sizable amount of coal and iron ore production that is unprofitable”. Prices have fallen further since those comments from early August.
Low interest rates continue to support lending but mostly for mortgages on existing property, which does not add to the productive capacity of the Australian economy. Credit outstanding to housing investors rose by almost 9 per cent over the year to July, compared with just 3.4 per cent for businesses. It’s been great for our banks and real estate agents but of little benefit to the broader economy.
Residential investment remains the one shining light and data earlier today indicates that the residential construction boom may be a little more persistent than previously thought (An apartment construction boom chaser, September 2). Nevertheless, residential investment is only a small share of real GDP and it is hardly the pillar upon which you want to base rebalancing growth.
Inflationary pressures appear to have peaked -- at an annual rate of 3 per cent -- and will begin to ease somewhat on the back of poor wage growth and the modest rise in the Australian dollar during 2014. The RBA believes that the dollar remains overvalued, though there is little sign yet that demand for our currency has diminished.
Naturally there remains considerable uncertainty surrounding the outlook and conditions could improve significantly from here on out. But equally likely -- or indeed more likely if the Chinese property market continues to deteriorate -- is that the Australian economy will miss the RBA’s forecasts and more support will be required.
It’d be fascinating to be a fly on the wall at the RBA boardroom right now and I suspect that member’s policy discussions are particularly animated. The RBA is obviously taking a cautious approach to policy and is reluctant to lower rates further but there is no shortage of doves within the institution.
Hopefully the Australian economy will shift gears and march back towards trend but if it outlook deteriorates further -- as has been the case over the past six months -- the RBA shouldn’t hesitate to cut rates further.
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