RBA keeps interest rates on hold
Minutes of the February Reserve Bank Board meeting suggest Board members were very comfortable to keep interest rates on hold.
- Reserve Bank Board members discussed the improving global economic conditions with a particular focus on China and the resulting boost in commodity prices. “A wide range of indicators showed that growth in the Chinese economy had stabilised, underpinned by public spending and somewhat stimulatory financial policies, which had boosted investment in infrastructure and housing”.
- While the RBA will maintain an easing bias the improvement in domestic economic conditions is likely to keep the central bank on the interest rate sidelines. “The Board had reduced the cash rate by 175 basis points since late in 2011, including by 50 basis points in the last quarter of 2012. Interest rate sensitive parts of the economy had shown some signs of responding to these lower rates”.
What does it all mean?
- Well it was hardly a surprise that there wasn’t anything significantly new in the minutes of the last Reserve Bank Board meeting. Especially considering that with the decision to keep interest rates on hold in early February we had the accompanying statement, and since then we have had the release of the Statement on Monetary Policy and also a speech by Reserve Bank Assistant Governor Kent in the last two weeks. If anything the minutes tend to confirm the view portrayed just over a week ago, when the Reserve Bank released its latest growth and inflation forecasts.
- Overall, it is clear that the Reserve Bank is sitting comfortably on the interest rate sidelines. Policymakers seem more comfortable with global economic conditions, and the modest improvements taking place in the domestic economy.
- In particular the Board made mention of a “wide range of indicators” that showed growth in China had stabalised, commodity prices had found support and “indications of stronger growth of domestic demand” in the Asian region. Interestingly the minutes clear highlight that the downside risks lay with the Eurozone. Policymakers were more comfortable of the financial stability in the Eurozone however the region was expected to remain weak and the “structural problems facing a number of countries were significant”.
- It’s clear that if interest rates were to change, it would be down. CommSec continues to pencil in the possibility of just one further rate cut over the rest of 2013, however it would only be needed if a left field event were to take place. Rather interest rates look set to remain on hold over the near term given the improvements that have taken place in the domestic economy.
- In fact the urgency to cut interest rates in coming months has lessened, despite the modest downgrades to medium term growth forecasts fleshed out in the Monetary Policy Statement. Interest rate sensitive parts of the economy had shown signs of responding to the rate cuts, resource exports had recorded a strong boost, commodity prices have also lifted, while the pickup in share markets, lift in house prices and a modest improvement in confidence should provide policymakers with a degree of comfort.
- The central bank has been adverse to moving interest rates too far away from a normal or neutral setting. The average mortgage rate at 6.40 per cent is well below the 15-year average of 7.20 per cent and as such it is conceivable that in coming months the Reserve Bank will continue to jawbone – effectively talk down interest rates rather than actually providing a further rate cut.
What do the figures show?
Minutes from the February 2013 Reserve Bank Board meeting
More positive global outlook
“Members began their discussion by noting that global economic developments had, on balance, been more positive since the December meeting. This was consistent with expectations of a gradual pick-up in the growth of global economic activity following the weakness seen in the September quarter 2012. Overall, growth was forecast to be around or a little above its long-term average over the next two years, with a strong contribution from faster-growing Asian economies.”
Commodity prices
“Members observed that iron ore prices had increased significantly over the past two months, largely reflecting stronger demand from China owing to increased industrial activity there as well as some rebuilding of iron ore stocks after earlier depleting inventories. However, iron ore prices had run well ahead of Chinese steel prices in recent months and it was widely expected that iron ore prices would not be sustained at these high levels. More generally, the improved global outlook had led to higher spot prices for many metals, coal and crude oil over recent months, but coal prices remained well below levels of a year earlier. Overall, the terms of trade were around 17 per cent below their late 2011 peak and the forecast profile was little changed.”
Domestic conditions
“Household consumption in the September quarter had slowed from the rapid pace seen in the first half of 2012. Information available at the time of the meeting, including from liaison, suggested that growth in the December quarter may have picked up a little, although conditions varied for different types of retailers. Over the same period, sales of motor vehicles had risen strongly. Measures of consumer confidence were at, or even a little above, long-run average levels”.
On labour demand
“The slightly softer outlook for economic activity overall was expected to affect the labour market. Employment growth was forecast to remain modest over the course of the next year, before rising gradually towards the end of the forecast period.”
Outlook for rates
“Interest rate sensitive parts of the economy had shown some signs of responding to these lower rates, which were well below their longer-run averages, and further effects could be expected over time. At the same time, the exchange rate remained high despite the terms of trade having declined significantly since peaking about 18 months earlier. The inflation outlook, as assessed at this meeting, would afford scope to ease policy further, should that be necessary to support demand. Noting that monetary policy was already accommodative as a result of the substantial easing of policy over the past 15 months, and that this stimulus was continuing to work its way through the economy, the Board judged that it was prudent to leave the cash rate unchanged at this meeting.”
What is the importance of the economic data?
The Reserve Bank releases minutes of its monthly Board meeting a fortnight after the event. The minutes give a guide to Reserve Bank thinking on interest rate settings.
What are the implications for interest rates and investors?
Interest rates are now clearly below long-term averages, inflation is in the middle of the target band, monetary policy is at a stimulatory setting and economic growth was near trend. All these factors allow the Reserve Bank time to get a more accurate picture of the economic landscape. The question is whether the bank has a target in mind for the cash rate. As such another rate cut cannot be ruled out but it certainly is looking less likely.