RBA: Stable interest rates; labour market in focus

From

RBA Board minutes

  • Reserve Bank Board minutes: Board members continue to expect a period of stability in interest rates. Board members appeared to spend a lot of attention on the labour market, commenting “that a range of indicators of labour demand suggested a modest improvement in prospects for employment, although the unemployment rate was still expected to edge higher for a time”.
  • Forward-looking Reserve Bank. Board members discussed the “industry composition of output, investment and employment growth over the past two decades”, and downplayed the manufacturing job losses: “future employment growth was likely to continue to be concentrated in service industries”.
  • Cautiously optimistic outlook. Policymakers noted “promising signs” of stronger home building and consumer spending to offset weaker mining investment and public spending.

What does it all mean?

  • The Reserve Bank Board minutes suggested a level of contentment amongst Board Members. Not only were generationally-low interest rates fostering a pickup in activity, but Board members believed that the encouraging lift in home building and consumer spending was likely to offset the weaker investment in mining and public spending.
  • Interestingly the minutes stressed that Board members believed that “the cash rate could remain at its current level for some time if the economy was to evolve broadly as expected”. In other words, policymakers are hoping that the super stimulus being provided by low rates will be enough to see growth return to trend or “normal” levels.
  • Given the mild sense of optimism being portrayed by the central bank, it was interesting that focus shifted to a historical retrospective discussion on longer-term growth drivers and, in turn, a view of the future composition of output, investment and employment. Essentially the Reserve Bank downplayed the job losses in the manufacturing sector and believed that “future employment growth was likely to be concentrated in service industries”. Looking forward it is very likely that the labour market is likely to be the key determinant of when interest rates lift from current generational lows. At present, despite the improvement in labour market conditions, the Reserve Bank still believes that unemployment is likely to rise mildly.
  • Turning to the housing sector, none of the Reserve Bank Governor’s recent speech expressing caution on the ongoing lift in house prices was noted in the minutes. It may be that the central bank believes that the ongoing lift in house prices are the lesser of two evils, fostering a lift in household wealth, supporting confidence and spending. In addition the anticipated lift in housing supply may help to curtail home prices pressures in the medium term.
  • Overall the minutes suggest an air of cautious optimism. The super stimulatory monetary policy setting is supporting a pickup in activity across interest rate sensitive sectors. If there is an ongoing lift in activity and unemployment holds relatively steady, the Reserve Bank will be comfortable remaining on the interest rate sidelines in the short-term before lifting rates towards the end of the year.

What do the minutes and data reveal?

RBA Board minutes:

  • The full-text of the minutes can be found here
  • The Reserve Bank Board members took some time to reflect on the changes in the labour market:

“Members began their discussion of the domestic economy with the labour market, which remained weak despite a strong rise in employment in February and an upward revision to employment in January. .. Meanwhile, a range of indicators of labour demand suggested a modest improvement in prospects for employment, although the unemployment rate was still expected to edge higher for a time”.

“Members discussed the industry composition of output, investment and employment growth over the past two decades. They noted that employment growth had been spread across many industries, although the industries with the largest contributions to employment growth – particularly service industries – had not been the same industries with the largest contributions to growth of output and investment. Members noted that future employment growth was likely to continue to be concentrated in service industries. Data from the ABS capital expenditure survey indicated that a number of non-mining industries were expecting to increase their investment spending a little in the following financial year “

  • Reserve Bank Board members are growing more confident, noting firmer growth and the baton change from mining to housing.

“Members noted that while falling mining investment and weak public demand were set to constrain growth for some time, there were early promising signs in other parts of the economy particular, a strong pick-up in dwelling investment was in prospect and there was some evidence that consumer demand had strengthened a little. Indicators for exports remained strong, while those for business conditions were generally higher than they had been in 2013. However, many businesses appeared to be waiting for an increase in current demand to occur before they were willing to increase investment spending.”

  • On Monetary Policy:

“At recent meetings, the Board had judged that it was prudent to leave the cash rate unchanged and members noted that the cash rate could remain at its current level for some time if the economy was to evolve broadly as expected. Developments over the past month had not changed that assessment. There had been further signs that low interest rates were supporting domestic activity. Members noted that the exchange rate remained high by historical standards. Despite commodity prices falling further over the past month, the exchange rate had appreciated a little further. While the decline in the exchange rate from its highs a year earlier would assist in achieving balanced growth in the economy, this would be less so than previously expected given the rise in the exchange rate over the past few months.

On the basis of this assessment, the Board’s judgement was that monetary policy was appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the 2–3 per cent inflation target. The Board would continue to monitor developments in the economy, with members noting that, on present indications, the most prudent course was likely to be a period of stability in interest rates.”

What is the importance of the report?

  • 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.
  • It is clear from the latest minutes that Board members see the glass as half-full rather than half-empty. Home building is growing strongly and will boost the economy over the next year. And stabilisation of the job market will provide further momentum for the economy.
  • CommSec expects rates to remain on hold in the near term before lifting towards the end of this year. Next week’s inflation data and the Federal Budget in May will be the next key data points watched by policymakers.

What are the implications for interest rates and investors?

  • It is clear from the latest minutes that Board members see the glass as half-full rather than half-empty. Home building is growing strongly and will boost the economy over the next year. And stabilisation of the job market will provide further momentum for the economy.
  • CommSec expects rates to remain on hold in the near term before lifting towards the end of this year. Next week’s inflation data and the Federal Budget in May will be the next key data points watched by policymakers.

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