Triple A at risk? Reserve Bank stresses stability

What does it all mean?

• All politicians must take heed of the warning by Standard and Poor’s on Australia’s credit rating. Unpalatable choices must be made to the structure of Australia’s pensions, benefits and support payments as well as Australia’s tax structure. The Budget must be passed and bi-partisan agreements are needed on future spending and taxing – that’s what Australians believe that politicians should be doing. No Australian wants the economy to get in the same predicament as a raft of European countries. Australia’s economy is in good shape through good stewardship by Reserve Bank, Federal Treasury and governments of all persuasion over the past 20 years. It is important it stays that way. As former state treasurers acknowledge, the GST rate has to be increased or the tax broadened in coming years to address fiscal challenges with the ageing population. It is important that community discussion on the topic starts now.
• The Reserve Bank believes that everything is going to plan. That is, domestic conditions “had evolved broadly in line with earlier expectations.” In short, there is no need to change monetary settings. Rates are set to remain unchanged for a few more months yet.
• Before the Federal Budget was handed down the Reserve Bank Board observed “Over 2014/15, GDP growth was expected to be a bit below trend, with the effects of monetary stimulus partly offset by the downturn in mining investment and planned fiscal consolidation.” In other words, monetary policy is balancing fiscal policy. We will have to wait for the June Reserve Bank Board meeting to find out whether there is any change in emphasis and magnitude of this balancing act.

What do the minutes and data reveal?

RBA Board minutes

• The full-text of the minutes can be found here.

The key final paragraph:

• “At recent meetings, the Board had judged that it was prudent to leave the cash rate unchanged. The expansionary setting of monetary policy continued to have the expected effects on economic activity. Notably, a sustained increase in dwelling investment was in prospect, consumption had strengthened a little and business conditions were around average levels. Recent developments had indicated that the economy had evolved broadly in line with earlier expectations, resulting in little change in the updated forecasts for activity and inflation. With growth in activity expected to pick up only gradually, and spare capacity in the labour market consequently remaining for some time, growth in domestic costs was forecast to remain contained, which would help to offset the ongoing effect on prices from the depreciation of the exchange rate over the past year. Given this outlook for the economy and the significant degree of monetary stimulus already in place to support economic activity, the Board considered that the current accommodative stance of policy was likely to be appropriate for some time yet.”
  • The Reserve Bank says that the domestic economy “had evolved broadly in line with earlier expectations.”
  • The Reserve Bank says “Inflation was consistent with the target and was forecast to remain so over the next couple of years.”

Consumer confidence

• The authors report: “The ANZ-Roy Morgan Consumer Confidence fell a further 3.2 per cent to 100.4 in the week ending 18 May, after the 2014-15 Commonwealth Budget was handed down. Consumer Confidence began weakening noticeably four weeks ago when some significant policies were leaked ahead of the Federal Budget’s release and is down a sharp 14 per cent since then; the steepest decline over a four week period since the series became weekly in October 2008.”
  • 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.
  • The next interest rate decision on June 4 will be super-important. Not because of some imminent change in rates, but because the Reserve Bank will be able to give its judgement on the fiscal contraction associated with the Federal Budget and the implications that this poses for interest rate settings.
  • CommSec remains hopeful that Budget measures will pass the Senate; that confidence levels will recover; and that economic momentum won’t be adversely affected. We continue to expect the first interest rate hike this cycle to be delivered either late in 2014 or early 2015.
  • The Aussie dollar has lost a bit of ground over the last 24 hours on the warning by Standard and Poor’s. The progression of the Budget through the Senate is a short-term obstacle for the Aussie dollar.
  • The Budget wrangling has upset consumer confidence. In a macro sense the Budget isn’t a major drag on the economy but the perception of hurt from Budget changes is impacting confidence to a greater extent that the reality of the actual decisions.

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.

What are the implications for interest rates and investors?

• The next interest rate decision on June 4 will be super-important. Not because of some imminent change in rates, but because the Reserve Bank will be able to give its judgement on the fiscal contraction associated with the Federal Budget and the implications that this poses for interest rate settings.
• CommSec remains hopeful that Budget measures will pass the Senate; that confidence levels will recover; and that economic momentum won’t be adversely affected. We continue to expect the first interest rate hike this cycle to be delivered either late in 2014 or early 2015.
• The Aussie dollar has lost a bit of ground over the last 24 hours on the warning by Standard and Poor’s. The progression of the Budget through the Senate is a short-term obstacle for the Aussie dollar.
• The Budget wrangling has upset consumer confidence. In a macro sense the Budget isn’t a major drag on the economy but the perception of hurt from Budget changes is impacting confidence to a greater extent that the reality of the actual decisions.