Reserve Bank takes aim at Aussie dollar

Reserve Bank Board minutes; Consumer confidence

• Reserve Bank Board minutes: There was no discernible change in the tone of the Board minutes when it comes to view on interest rates. The Reserve Bank reiterated “that the most prudent course was likely to be a period of stability in interest rates”.
• Aussie dollar the focus: The Reserve Bank continued to reiterate the need for a lower Australian dollar highlighting that “despite the depreciation of the exchange rate, the Australian dollar remained above most estimates of its fundamental value, particularly given the significant declines in key commodity prices over recent months. Members agreed that further exchange rate depreciation was likely to be needed to achieve balanced growth in the economy.”
• Reserve Bank expects GDP growth to be below trend in the near term: “GDP growth was still expected to be below trend over 2014/15 before gradually picking up to an above-trend pace towards the end of 2016.”
• Consumer confidence falls: The weekly ANZ/Roy Morgan consumer confidence rating fell by 0.2 per cent in the week to December 14. The index is now at a four month low.

What does it all mean?

• The Reserve Bank continues to preach stability in interest rates. There is nothing in the latest minutes to suggest that Board members have become more optimistic, nor more pessimistic. The Board believes that the cash rate is at the right level to support the economy and keep inflationary pressures in check.
• However the Central Bank once again reiterated the need for an even lower Australian dollar despite the fact that the currency has recorded a considerable fall in the past few months. The minutes noted that the “Members agreed that further exchange rate depreciation was likely to be needed to achieve balanced growth in the economy”. It is pretty clear that policymakers would like to see the currency fall further and help in rebalancing the economy towards export orientated sectors.
• Interestingly the Reserve Bank also noted that markets were pricing in modest rate cuts in the early part of 2015 and they discussed the likely scenarios that would result in a rate cut. Clearly if the currency had been rising then rate cuts would be more likely. However at present the ongoing slide in the Australian dollar would certainly make them more comfortable to keep rate on hold.
• No doubt the trigger for rates is the labour market. Policymakers did note “that subdued labour market conditions were likely to weigh on consumption growth and consumer confidence more generally.” If unemployment were to lift markedly then a further rate cut may take place. But forward looking labour market indicators suggest jobs growth should improve over 2015. Job ads are almost 9 per cent higher than a year ago and are now holding at 20-month highs. In addition the lift in housing activity will continue to play a significant part in driving activity and employment over the coming year.
• Overall given the number of variable factors it is likely that the Reserve Bank will be keep rates on hold over the first half of 2015 and if the economy pans out as we expect a rates are more likely to rise in the second half of the year.
• Despite the latest pullback, consumer confidence remains healthy. Over the past few months households have been generally upbeat and the mild pullback over the past fortnight is probably more to do with a modest consolidation in sentiment than any deep structural issue with household finances. A few negative factors likely ongoing media coverage over the past week on the blowout in the budget deficit would have contributed to the recent pullback in confidence.

What do the figures show?

Consumer sentiment:

• The ANZ/Roy Morgan consumer confidence rating fell by 0.2 per cent to 110.2 in the week to December 14 after a 3.1 per cent fall in the previous week. The confidence rating is now at a four-month low.
• Just two of the five components of the index rose in the latest week:
• The estimate of family finances compared with a year ago was up from +4 to +5;
• The estimate of family finances over the next year was up from +20 to +25;
• Economic conditions over the next 12 months was down from -6 to -12;
• Economic conditions over the next 5 years was unchanged at +3;
• The measure on whether it was a good time to buy a major household item was down from +31 to +30.

Reserve Bank Board minutes:

• Minutes of the Reserve Bank Board meeting held on December 2 can be found here.
• The ANZ/Roy Morgan weekly survey of consumer confidence closely tracks the monthly Westpac/Melbourne Institute consumer sentiment index but the former measure is a timelier assessment of consumer attitudes and is now closely tracked by the reserve Bank.
• 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.
• At present the Reserve Bank is in a delicate balancing act of keeping interest rates low to support the broader economic recovery while hoping house price growth eases over the medium term. And the ongoing lift in home building should provide policymakers with some added comfort.
• The latest data give the Reserve Bank no reason to change its views on the economic recovery or interest rates. Low rates will continue to foster stronger domestic growth. CommSec expects no change to monetary policy until the second half of 2015, when a modest lift in rates may take place.

What is the importance of the economic data?

• The ANZ/Roy Morgan weekly survey of consumer confidence closely tracks the monthly Westpac/Melbourne Institute consumer sentiment index but the former measure is a timelier assessment of consumer attitudes and is now closely tracked by the reserve Bank.
• 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?

• At present the Reserve Bank is in a delicate balancing act of keeping interest rates low to support the broader economic recovery while hoping house price growth eases over the medium term. And the ongoing lift in home building should provide policymakers with some added comfort.
• The latest data give the Reserve Bank no reason to change its views on the economic recovery or interest rates. Low rates will continue to foster stronger domestic growth. CommSec expects no change to monetary policy until the second half of 2015, when a modest lift in rates may take place.