Reserve Bank battles fog; uncertain consumers

Consumer confidence; Reserve Bank Board Minutes

• Consumer confidence: The weekly ANZ/Roy Morgan consumer confidence rating rose by 0.5 per cent in the week to March 15 to a reading of 110.8, mildly below the average level since 2014 of 111.4.
• Reserve Bank Board minutes: Members considered cutting rates again at the March meeting but held off due to a range of uncertainties, including doubts on how borrowers and consumers would respond.

What does it all mean?

• The Reserve Bank is peering through the fog, trying to work out where to go from here. And aware that there are immense uncertainties in the current environment and that is no rush to cut rates again, Board members elected to sit quietly at the March rate setting meeting. Simply, Board members are hoping the fog will lift in the period ahead so they know which way to proceed from here.
• One salient point from the latest Board minutes is that members are uncertain about the reactions of Aussie consumers and businesses in the current low rate environment. In other words, will rate cuts have a positive effect in boosting spending and investment or will people become worried that interest rates are too low. It is certainly clear so far that the February rate cut hasn’t led to a sustained lift in confidence levels.
• Consumers clearly remain nonplussed. The job market improved in the latest month but the Aussie dollar remains soft and petrol prices are well above the lows reached in January. In addition there was no improvement in Federal politics – politicians still can’t seem to come to agreement on the Budget initiatives being held up in the Senate.
• There were no changes of note in the five components of the consumer confidence index.
• The disappointment for the Reserve Bank is that the February rate cut has come and gone and consumer sentiment is weaker, not stronger. The Reserve Bank will continue to think long and hard about the benefits of continuing to cut interest rates with no real expectation that it will kick start growth.

What do the figures show?

Consumer sentiment:

• The ANZ/Roy Morgan consumer confidence rating rose by 0.5 per cent from six-month lows in the week to March 8 to 110.8, mildly below the average since 2014 of 111.4.
• Three 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 +6;
• The estimate of family finances over the next year was up from +22 to +25;
• Economic conditions over the next 12 months was down from -7 to -8;
• Economic conditions over the next 5 years was up from 0 to +1;
• The measure on whether it was a good time to buy a major household item was down from +32 to +30.

Reserve Bank Board minutes:

• Minutes of the Reserve Bank Board meeting held on March 3 can be found here.
• The key quotes from the Board minutes:
• “Members noted that the current setting of monetary policy had been accommodative for some time and that the recent reduction in the cash rate would provide some further support to the economy. They also acknowledged that a lower exchange rate would help achieve balanced growth in the economy. Nonetheless, on the basis of the current forecasts for growth and inflation, members were of the view that a case to ease monetary policy further might emerge.”
• “In considering whether or not to reduce the cash rate further at this meeting, members saw benefit in allowing some time for the structure of interest rates and the economy to adjust to the earlier change. They also saw advantages in receiving more data to indicate whether or not the economy was on the previously forecast path. Further, they noted the greater degree of uncertainty about the behaviour of borrowers and savers in a world of very low interest rates. Taking account of all these factors, members judged it appropriate to hold the cash rate steady for the time being, while recognising that further easing over the period ahead may be appropriate to foster sustainable growth in demand while maintaining inflation consistent with the target.”
• “While credit had continued to grow a little faster than incomes, household leverage had not increased significantly and the Bank would continue to work with other regulators to assess and contain risks that might arise from the housing market.”
• 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.
• Each Reserve Bank Board meeting in the next couple of months is a “live” meeting – that is, the Board could decide to cut rates. It is now all about strategy. And that strategy hasn’t been adequately shared with financial markets. Perhaps the Reserve Bank Governor will provide further insights into his thinking in a speech to be delivered on Friday.
• Interestingly, the Reserve Bank Board still believes there are potential benefits to be reaped from a rate cut – it depends whether interest rate savings are spent or saved.
• “They noted that the interest payments made by borrowers are significantly larger than the income received by holders of interest-bearing assets and, as a result, the very low level of interest rates was acting, other things equal, to support aggregate disposable income available for consumption. Members noted that the net effect on consumption through this transmission channel was a function of a number of factors, including the distribution of loans and interest-bearing assets across households and the extent to which the consumption behaviour of different households responds to low interest rates.”

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?

• Each Reserve Bank Board meeting in the next couple of months is a “live” meeting – that is, the Board could decide to cut rates. It is now all about strategy. And that strategy hasn’t been adequately shared with financial markets. Perhaps the Reserve Bank Governor will provide further insights into his thinking in a speech to be delivered on Friday.
• Interestingly, the Reserve Bank Board still believes there are potential benefits to be reaped from a rate cut – it depends whether interest rate savings are spent or saved.
• “They noted that the interest payments made by borrowers are significantly larger than the income received by holders of interest-bearing assets and, as a result, the very low level of interest rates was acting, other things equal, to support aggregate disposable income available for consumption. Members noted that the net effect on consumption through this transmission channel was a function of a number of factors, including the distribution of loans and interest-bearing assets across households and the extent to which the consumption behaviour of different households responds to low interest rates.”