Reserve Bank: Assessing the evidence

From

Reserve Bank Board meeting

  • The Reserve Bank has left the cash rate at a record low of 1.00 per cent. The Reserve Bank previously cut rates in both June and July, each time by 25 basis points or a quarter of a per cent.

What has changed since the last meeting?

  • The G7 Summit and Jackson Hole central bank symposium were overshadowed by US-China trade tensions.
  • The German and the UK economies contracted in the June quarter as business investment and exports fell.
  • The US Treasury yield curve inverted (2-year yields above 10-year yields) – in the past this has occurred before recessions.
  • The Australian jobless rate was steady at 5.2 per cent in July and the participation rate hit a record 66.1 per cent.
  • Skilled internet job vacancies increased by 0.4 per cent in July – the first increase in seven months.
  • The Wage Price Index rose by 0.6 per cent in the June quarter to be up 2.3 per cent on the year.
  • Capital city home prices rose by 1.0 per cent in August – the biggest rise since March 2017.
  • Private sector credit rose by just 0.2 per cent in July. Annual credit growth is 3.1 per cent – an 8-year low.
  • Retail trade fell by 0.1 per cent in July.
  • A record trade surplus of $8 billion occurred in June and the first current account surplus was recorded in 44 years in the June quarter.
  • The ASX200 index lost 3.1 per cent in August, breaking its longest monthly winning streak since September 2009.
  • The iron ore price fell by 27 per cent to US$85.85 a tonne in August.
  • The 10-year Australian Commonwealth Government bond yield hit a record low 0.85 per cent.
  • The Australian dollar has held around US66-69 cents.

The assessment

  • Reserve Bank policymakers have maintained their policy easing bias today, leaving the door open for further rate cuts, “if needed”. But in a subtle change to the all-important final paragraph, the word “including” was added to “in the labour market” comment, re-emphasising the importance of continued job growth to the interest rate outlook. While the Board remained patient in August and September, we expect the cash rate to be cut again in November. In fact, there seems little reason to delay pulling the interest rate lever, in our view, given the Bank has recently modelled its downgraded economic growth, jobless and inflation forecasts on two rate cuts.
  • That said, Governor Phillip Lowe appears sceptical about the effectiveness of taking interest rates towards the lower bound (near zero), arguing at the Jackson Hole symposium, “….given the challenges we face at the moment, it [monetary policy] is not the best lever.”

Perspectives on interest rates

  • In July, the Reserve Bank Board cut the cash rate by 25 basis points (quarter of a per cent) to 1.00 per cent after a similar cut in June. There have now been 14 rate cuts since November 2011 with the cash rate cut from 4.75 per cent.
  • The Reserve Bank had lifted rates seven times from October 2009 to November 2010 from 3.00 per cent to 4.75 per cent.

What are the implications of yesterday’s decision?

  • The property market is recovering and consumers are feeling more upbeat about their current finances thanks to tax cuts and lower borrowing costs. But tepid wages growth and elevated mortgage debt remain headwinds to the consumer.

Comparing the two most recent statements

  •  The statement from the August 2019 meeting is on the left; the statement from today’s September 2019 meeting is on the right. Emphasis has been added to highlight key points in the wording in the statements.

———-

Statement by Philip Lowe, Governor:  Monetary Policy Decision – 3 September 2019

At its meeting today, the Board decided to leave the cash rate unchanged at 1.00 per cent.

The outlook for the global economy remains reasonable, although the risks are tilted to the downside. The trade and technology disputes are affecting international trade flows and investment as businesses scale back spending plans due to the increased uncertainty. At the same time, in most advanced economies, unemployment rates are low and wages growth has picked up, although inflation remains low. In China, the authorities have taken further steps to support the economy, while continuing to address risks in the financial system.

Global financial conditions remain accommodative. The persistent downside risks to the global economy combined with subdued inflation have led a number of central banks to reduce interest rates this year and further monetary easing is widely expected. Long-term government bond yields have declined and are at record lows in many countries, including Australia. Borrowing rates for both businesses and households are also at historically low levels. The Australian dollar is at its lowest level of recent times.

Economic growth in Australia over the first half of this year has been lower than earlier expected, with household consumption weighed down by a protracted period of low income growth and declining housing prices and turnover. Looking forward, growth in Australia is expected to strengthen gradually to be around trend over the next couple of years. The outlook is being supported by the low level of interest rates, recent tax cuts, ongoing spending on infrastructure, signs of stabilisation in some established housing markets and a brighter outlook for the resources sector. The main domestic uncertainty continues to be the outlook for consumption, although a pick-up in growth in household disposable income and a stabilisation of the housing market are expected to support spending.

Employment has grown strongly over recent years and labour force participation is at a record high. The unemployment rate has, however, remained steady at 5.2 per cent over recent months. Wages growth remains subdued and there is little upward pressure at present, with strong labour demand being met by more supply. Caps on wages growth are also affecting public-sector pay outcomes across the country. A further gradual lift in wages growth would be a welcome development. Taken together, recent labour market outcomes suggest that the Australian economy can sustain lower rates of unemployment and underemployment.

Inflation pressures remain subdued and this is likely to be the case for some time yet. In both headline and underlying terms, inflation is expected to be a little under 2 per cent over 2020 and a little above 2 per cent over 2021.

There are further signs of a turnaround in established housing markets, especially in Sydney and Melbourne. In contrast, new dwelling activity has weakened. Growth in housing credit remains low. Demand for credit by investors continues to be subdued and credit conditions, especially for small and medium-sized businesses, remain tight. Mortgage rates are at record lows and there is strong competition for borrowers of high credit quality.

It is reasonable to expect that an extended period of low interest rates will be required in Australia to make progress in reducing unemployment and achieve more assured progress towards the inflation target. The Board will continue to monitor developments, including in the labour market, and ease monetary policy further if needed to support sustainable growth in the economy and the achievement of the inflation target over time.

You must be logged in to post or view comments.