RBA Board minutes

• Triple A Credit rating: The Financial Review has reported in an “exclusive” today, that “Rating agency Standard and Poor’s is warning Australia’s prized AAA credit rating could be reviewed unless substantial cuts are made to the budget in coming years.”
• Consumer confidence falls: The Roy Morgan – ANZ weekly consumer confidence index fell by 3.2 per cent to 100.4 in the week to May 18. The index has fallen 14 per cent over the past four weeks.
• Reserve Bank Board minutes: Board members “considered that the current accommodative stance of policy was likely to be appropriate for some time yet.”

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.

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RBA cuts interest rates by 25 basis points.

Reserve Bank Board meeting

• The Reserve Bank Board has cut the official cash rate by 25 basis points or a quarter of a per cent to 2.50 per cent. It was the first rate cut since May and keeps official rates at the lowest levels recorded in 53 years. It was the first cut in official interest rates in an election period. The Reserve Bank has signalled that rates are on hold for now. The next RBA Board meeting is on September 4 2013.
• While the cash rate has fallen to the lowest levels in more than 50 years, key lending rates like the bank variable housing rate are still above historic lows. If the rate cut is passed on, the variable rate would fall to 5.95 per cent, still above the 41-year low of 5.75 per cent that existed from April-May 2009.

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CANSTAR issue advice to shop around ahead of RBA rates review.

Commenting ahead of the RBA announcement, Mitchell Watson, Research Manager for CANSTAR said:

“Last week Reserve Bank Governor Glenn Stevens gave a speech in which he called the end to the investment growth phase of the mining boom. He stated that there is no natural successor to that growth at the moment and monetary policy may need to encourage non-mining investment. He also stated that the current inflation outlook provides scope to ease further. Markets do seem to have interpreted those comments as a likely call to action this month.

It is interesting to note, though, that over the past twenty years interest rates have been lowered during only one election campaign period; in 2001 when rates were lowered by 0.25% two months in succession. In other words, only one of the past seven election campaigns has seen an RBA movement downwards on rates.

The recent fall in the value of the Australian dollar against the greenback has taken some pressure off the RBA, however Glenn Stevens did note last week that we need to raise business confidence and raise household confidence from their current levels in order to find that mining boom successor.

Irrespective of the RBA decision, consumers should still question whether they are getting the best deal available for their borrowing needs. On our database for example, the average standard variable rate is currently 5.71%, but the lowest variable rate on our database currently is 4.74%. Now, a mortgage holder with a $300,000 mortgage over 25 years who did their own research and switched from an average rate to the lowest rate could potentially save themselves more than $170 per month and more than $50,000 over the life of their loan.

So the message for all borrowers is to know your rate, the features and benefits of your loan and shop around.”

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• The Reserve Bank Governor has delivered testimony to the House of Representatives Economics Committee.
• The Governor says that the economy is growing close to trend or average; Inflation is low and unemployment is relatively low; and the global economy is expected to growth at a trend pace. In short, nirvana has been achieved.
• In terms of the Aussie dollar, the Governor noted that “it was a bit on the high side but not dramatically so.” The Governor said the Reserve Bank hadn’t intervened to support a certain level of the currency.

What does it all mean?

• If the Reserve Bank Governor wanted to let us in on a secret, today would have been the day to do it. He didn’t. There were no fresh insights, and no new concerns. Even in terms of the Aussie dollar, the Governor indicated that it was high, but not dramatically so. In an economic sense, some would suggest that it was all a bit boring.
• But it is a good form of boring; a form of boring that can assure businesses and consumers. In fact the Governor believes our economy is as good now as it has ever been. That view is certainly not new as the Governor has been trying to get the community to see the glass as “half full” rather than “half empty”.
• That doesn’t mean that there are no risks ahead – there always are. But the Reserve Bank Governor believes we are in a happy place.
• The bottom line is that interest rates won’t be changing any time soon. That is, provided that there are no fresh shocks in Europe.

Key aspects of the testimony

• The messages were the same. European leaders have a lot of challenges in front of them. In the US, growth is OK, but not great. In China, more sustainable economic growth is occurring.
• The world economy is OK. “The kind of growth envisaged for the world as a whole is close to its long-run average.”
• Europe has a lot of work to do. “Realistically, it will be quite some time before the Europeans will be able to say these problems have been put behind them, even if things go well.”
• In Australia, the economy is in good shape. “Looking back, then, the economy appears to have been recording reasonable overall growth, relatively low unemployment, and low inflation.”
• Looking ahead, the economy is expected to remain in good shape, although the composition of growth may change. “Overall, growth is forecast still to be close to trend, albeit with a different composition from that seen in the past year or two, and inflation consistent with the target.”
• The Governor sees a peaking of the construction phase of the mining boom, with production taking the reins thereafter. And then there may be a shift from mining to domestic building as a growth driver. “Looking ahead, the peak of the resource investment boom as share of GDP – the highest such peak in at least a century – will occur within the next year or two. After that the rate of resource investment is likely to decline, while the export shipments of the resources themselves will pick up. By then we might expect that some other sectors that have been weak of late, like residential and non-residential construction, might be starting to pick up.”
• Interest rates? The Governor is waiting to see what happens as a result of recent rate cuts. “It is too early to tell how much difference the sequence of decisions to lower interest rates late last year and in the middle of this year has made to the economy, though we can observe that dwelling prices may have stopped their earlier gentle decline, and business credit has been growing at its fastest pace for three years.”
• Questions & answers. Glenn Stevens said we (collectively Australians) needed to “get real” about home prices, and we have. That is, we had to realise that home prices don’t always go up, and go up significantly. He said we came to that realisation a few years ago.
• Stevens again rejected suggestions that bank profits were too high or that there wasn’t enough competition. Competition for deposits was strong. And return on equity for the banking sector was similar to other listed companies.
• Stevens said that he had not changed his mind on the mining boom. He had always expected the construction phase to end around 2013-2014 and that appears on track. He said that we have come through the boom without a jump in inflation and he believes that we will come through it without a slump in the economy at the end.
• Stevens also said that the RBA had not seen anything that would cause it to materially change its view on the pipeline of resource projects.
• Stevens rejected suggestions that there was currently a greater variation in economic performance across regions than in the past. He said that the economy had always been a “patchwork” and was surprised that variability in economic performance wasn’t actually bigger.
• Stevens was asked about the Aussie dollar. He said that “it was a bit on the high side but not dramatically so.” He also noted that “it is probably at present trading a bit above what I thought it would be on the basis of past relationships…”
• Assistant Governor Lowe described the new co-operation between central banks and governments in Europe as a “dance” and noted that they were “gradually moving in the right direction.” Inflation wasn’t a problem in Europe as banks were content to leave money with central banks at present rather than lend it out.

What is the importance of the economic data?

• The Reserve Bank Governor testifies to the House of Representatives Economics Committee twice a year.

What are the implications for interest rates and investors?

• The Reserve Bank maintains an easing bias, but it is by no means explicit. While we are pencilling in a rate cut near the end of the year, it is more a risk, not a definite forecast.
• The Reserve Bank isn’t unduly worried about the Aussie dollar at present, but it is on the radar screen. If the Aussie was to rise markedly from here, we believe that this would increase the chance of a rate cut. 

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