At its meeting today, the Board decided to leave the cash rate unchanged at 2.5 per cent.
Recent information is consistent with global growth running a bit below average this year, with reasonable prospects of a pick-up next year. Commodity prices have declined from their peaks, but generally remain at high levels by historical standards. Inflation in most countries remains well contained.
Overall, global financial conditions remain very accommodative. Changes in the outlook for US monetary policy have increased volatility in financial markets, but long-term interest rates remain very low and there is ample funding available for creditworthy borrowers.
In Australia, the economy has been growing a bit below trend over the past year. This is expected to continue in the near term as the economy adjusts to lower levels of mining investment. The unemployment rate has edged higher. There has been an improvement in indicators of household and business sentiment recently, though it is too soon to judge how persistent this will be. Inflation has been consistent with the medium-term target. With growth in labour costs moderating, this is expected to remain the case over the next one to two years, even with the effects of the lower exchange rate.
The easing in monetary policy since late 2011 has supported interest-sensitive spending and asset values. The full effects of these decisions are still coming through, and will be for a while yet. The pace of borrowing has remained relatively subdued to date, though recently there have been signs of increased demand for finance by households. There is also continuing evidence of a shift in savers' behaviour in response to declining returns on low-risk assets.
The Australian dollar rose recently, but is still about 10 per cent below its level in April. A lower level of the currency than seen at present would assist in rebalancing growth in the economy.
At today's meeting, the Board judged that the setting of monetary policy remained appropriate. The Board will continue to assess the outlook and adjust policy as needed to foster sustainable growth in demand and inflation outcomes consistent with the target.
The Reserve Bank has kept interest rates on hold for the second consecutive month, in a further shift towards a neutral stance as improving data boosts hopes that previous cuts are lifting the economy.
The cash rate, which is already at a 60-year-low, remained at 2.5 per cent, matching economists and the market's expectations.
"At today's meeting, the Board judged that the setting of monetary policy remained appropriate," RBA governor Glenn Stevens said in a statement.
"The Board will continue to assess the outlook and adjust policy as needed to foster sustainable growth in demand and inflation outcomes consistent with the target."
Mr Stevens added that a weaker Australian dollar would be welcome, strengthening his wording about the dollar from "would have to foster" to "would assist".
"The Australian dollar rose recently, but is still about 10 per cent below its level in April," he said, adding that "a lower level of the currency than seen at present would assist in rebalancing growth in the economy".
He added that while there has been a recent improvement in household and business sentiment, "it is too soon to judge how persistent this will be".
Deutsche Bank economist Phil O'Donaghoe said the new comments showed the RBA was encouraged by signs that the effects of monetary policy easing were filtering into the wider economy.
At the same time, capital city home values hit a new record high last month, with Sydney growing by 5.2 per cent. In contrast, prices slipped in Hobart by 3 per cent - the weakest performing capital city market.
Here is a “find and seek” exercise for those enjoying a mid afternoon tea of Monte Carlo and Twinnings.
When was the last time the RBA in report, paper or speech gave any indication that they are now of the view that “asset bubbles” can be identified and that an appropriate response is to “lean against them” with interest rates.
I could be wrong but my impression is that apart from some research papers quite a while ago the RBA has been very vague on whether it now subscribes to the “lean against the wind” school of asset price management.
If that is the case, how confident can we be that the RBA would raise interest rates to trim asset price rises while inflation is behaved and there is some sign of ‘weakness’ in the economy.
If Luci Ellis spots a platypus will she actually shoot it or will she let it swim away and cause havoc downstream?
Even now the RBA may not be for ‘leaning’ and even if they are now for ‘leaning’ will they admit that is what they are doing.
In summary that may mean when faced with rising asset prices the RBA response may be:
1. No MP – or recommendations for it
2. No interest rates rises (unless there happens to be an inflation break out)
I know this sounds like they may have learnt nothing from the events of the GFC but that conclusion is open.
Here is a “find and seek” exercise for those enjoying a mid afternoon tea of Monte Carlo and Twinnings.
When was the last time the RBA in report, paper or speech gave any indication that they are now of the view that “asset bubbles” can be identified and that an appropriate response is to “lean against them” with interest rates.
I could be wrong but my impression is that apart from some research papers quite a while ago the RBA has been very vague on whether it now subscribes to the “lean against the wind” school of asset price management.
If that is the case, how confident can we be that the RBA would raise interest rates to trim asset price rises while inflation is behaved and there is some sign of ‘weakness’ in the economy.
If Luci Ellis spots a platypus will she actually shoot it or will she let it swim away and cause havoc downstream?
Even now the RBA may not be for ‘leaning’ and even if they are now for ‘leaning’ will they admit that is what they are doing.
In summary that may mean when faced with rising asset prices the RBA response may be:
1. No MP – or recommendations for it
2. No interest rates rises (unless there happens to be an inflation break out)
I know this sounds like they may have learnt nothing from the events of the GFC but that conclusion is open.
The RBA doesn't seek to manage bubbles, it seeks to manage inflation.
Here is a “find and seek” exercise for those enjoying a mid afternoon tea of Monte Carlo and Twinnings.
When was the last time the RBA in report, paper or speech gave any indication that they are now of the view that “asset bubbles” can be identified and that an appropriate response is to “lean against them” with interest rates.
I could be wrong but my impression is that apart from some research papers quite a while ago the RBA has been very vague on whether it now subscribes to the “lean against the wind” school of asset price management.
If that is the case, how confident can we be that the RBA would raise interest rates to trim asset price rises while inflation is behaved and there is some sign of ‘weakness’ in the economy.
If Luci Ellis spots a platypus will she actually shoot it or will she let it swim away and cause havoc downstream?
Even now the RBA may not be for ‘leaning’ and even if they are now for ‘leaning’ will they admit that is what they are doing.
In summary that may mean when faced with rising asset prices the RBA response may be:
1. No MP – or recommendations for it
2. No interest rates rises (unless there happens to be an inflation break out)
I know this sounds like they may have learnt nothing from the events of the GFC but that conclusion is open.
The RBA doesn't seek to manage bubbles, it seeks to manage inflation.
Huh? In order for a bubble to occur house price inflation has to occur.
Property acquisition as a topic was almost a national obsession. You couldn't even call it speculation as the buyers all presumed the price of property could only go up. That’s why we use the word obsession. Ordinary people were buying properties for their young children who had not even left school assuming they would not be able to afford property of their own when they left college- Klaus Regling on Ireland. Sound familiar?
The evidence of nearly 40 cycles in house prices for 17 OECD economies since 1970 shows that real house prices typically give up about 70 per cent of their rise in the subsequent fall, and that these falls occur slowly. Morgan Kelly:On the Likely Extent of Falls in Irish House Prices, 2007
Huh? In order for a bubble to occur house price inflation has to occur.
That's not what they do.
Of course it is! Housing is counted in the CPI. It wouldn't be much use otherwise.
Quote:
5.27 The 16th series CPI basket is divided into eleven major groups, each representing a broad set of commodities:
◾Food and non-alcoholic beverages; ◾Alcohol and tobacco; ◾Clothing and footwear; ◾Housing; ◾Furnishings, household equipment and services; ◾Health; ◾Transport; ◾Communication; ◾Recreation and culture; ◾Education; and ◾Insurance and financial services.
5.28 These groups are divided in turn into 33 subgroups, and the sub-groups into 87 expenditure classes. Presentation of the CPI in the form of groups and sub-groups provides the user with quite a degree of versatility in interpreting the results. Index numbers for individual groups and sub-groups can be analysed separately as can their individual effects on the whole index.
Property acquisition as a topic was almost a national obsession. You couldn't even call it speculation as the buyers all presumed the price of property could only go up. That’s why we use the word obsession. Ordinary people were buying properties for their young children who had not even left school assuming they would not be able to afford property of their own when they left college- Klaus Regling on Ireland. Sound familiar?
The evidence of nearly 40 cycles in house prices for 17 OECD economies since 1970 shows that real house prices typically give up about 70 per cent of their rise in the subsequent fall, and that these falls occur slowly. Morgan Kelly:On the Likely Extent of Falls in Irish House Prices, 2007
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