Commbank Economic Insights - August 2014 by EO Sydney

Economic Insights

Economics | August 5 2014

Reserve Bank maintains the status quo Reserve Bank Board meeting

What does it all mean? 

It’s like a game of ‘spot Wally’. There have been no major changes in the wording of the interest rate decision – in fact there are only 10 extra words in the statement. The only major change concerns inflation. The Reserve Bank acknowledges that there has been an increase in both headline and underlying inflation. However the Reserve Bank attributes this to the lower exchange rate. Further it believes that inflation will remain in the 2-3 per cent target band, although it dropped reference to inflation staying in the band “over the next one to two years”.

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Interest rate settings remain stimulatory. At some point the Reserve Bank has to adopt more “normal” interest rate settings. And while there is no rush in the return to “normality”, the process has to begin at some point. The cash rate is at 2.5 per cent – the lowest level in 54 years. A level of interest rates that isn’t serving to boost economic activity is probably closer to 3.5 per cent.

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While we believe the Reserve Bank has time on its hands, it needs to be vigilant. The Reserve Bank has achieved enormous success in keeping inflation under control. But underlying inflation has been creeping higher and there are signs that the economy is shaking off the “Budget blues”. While we are pencilling in the first rate hike to be

Craig James – Chief Economist (Author) (612) 9118 1806 (work); Twitter: @CommSec Produced by Commonwealth Research based on information available at the time of publishing. We believe that the information in this report is correct and any opinions, conclusions or recommendations are reasonably held or made as at the time of its compilation, but no warranty is made as to accuracy, reliability or completeness. To the extent permitted by law, neither Commonwealth Bank of Australia ABN 48 123 123 124 nor any of its subsidiaries accept liability to any person for loss or damage arising from the use of this report. The report has been prepared without taking account of the objectives, financial situation or needs of any particular individual. For this reason, any individual should, before acting on the information in this report, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice. In the case of certain securities Commonwealth Bank of Australia is or may be the only market maker. This report is approved and distributed in Australia by Commonwealth Securities Limited ABN 60 067 254 399 a wholly owned but not guaranteed subsidiary of Commonwealth Bank of Australia. This report is approved and distributed in the UK by Commonwealth Bank of Australia incorporated in Australia with limited liability. Registered in England No. BR250 and regulated in the UK by the Financial Services Authority (FSA). This report does not purport to be a complete statement or summary. For the purpose of the FSA rules, this report and related services are not intended for private customers and are not available to them. Commonwealth Bank of Australia and its subsidiaries have effected or may effect transactions for their own account in any investments or related investments referred to in this report.

Economic Insights. Reserve Bank maintains the status quo

delivered in February 2015, the timeframe is by no means hard and fast. The Reserve Bank has no set agenda for either lifting or cutting rates in coming months. It is alert to the challenges ahead and so should Aussie consumers and businesses. 

In late May 1994, the Reserve Bank had left interest rates at historic lows for over 11 months and there were negligible signs that the period of stability was coming to an end. But in mid-August rates did start to lift, in fact the Reserve Bank delivered an aggressive 75 basis point increase. It then followed this up by 100 basis point increases in October and December. Consumers and businesses must guard against complacency.

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In February this year the Reserve Bank changed the wording of the key final paragraph of the rates decision, noting that a “period of stability” in rates was the prudent approach. It has maintained that wording ever since. At some point that wording will change.

What are the implications of today’s decision? 

Aussie consumers and businesses can get on with life. Interest rates are on hold for another month and a change in rate settings looks – at the very least – a number of months away.

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Those living on interest income, property rent or dividends must continue to scour for the best returns on offer.

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The combination of low interest rates and firm population growth will support activity in the housing market. Given the greater preference in some capital cities for apartments with their longer construction schedules, home prices should continue to grow at a healthy annual rate.

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The Reserve Bank is becoming more comfortable about home prices, now noting that the “increase in dwelling prices has been slower this year than last year” – a change because in July it only said “there have been some signs of a moderation in the pace of increase recently.”

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The next indicator to watch is the July job data on Thursday. And on Friday the Reserve Bank releases the quarterly Statement on Monetary Policy.

Craig James, Chief Economist, CommSec Work: (612) 9118 1806; Twitter: @CommSec

August 5 2014

Economic Insights. Reserve Bank maintains the status quo

Comparing the two most recent statements 

The statement from the July meeting is on the left; the statement from today’s August 2014 meeting is on the right. Emphasis has been added to significant changes in the wording in the statements.

MEDIA RELEASE

No: 2014-11 Date: 1 July 2014 Embargo: For Immediate Release

No: 2014-12 Date: 5 August 2014 Embargo: For Immediate Release

STATEMENT BY GLENN STEVENS, GOVERNOR: MONETARY POLICY DECISION

At its meeting today, the Board decided to leave the cash rate unchanged at 2.5 per cent.

Growth in the global economy is continuing at a moderate pace, helped by firmer conditions in the advanced countries. China's growth slowed a little earlier in the year but remains generally in line with policymakers' objectives. Commodity prices in historical terms remain high, but some of those important to Australia have declined.

Growth in the global economy is continuing at a moderate pace, helped by firmer conditions in the advanced countries. China's growth remains generally in line with policymakers' objectives. Commodity prices in historical terms remain high, but some of those important to Australia have declined this year.

Financial conditions overall remain very accommodative. Long-term interest rates and risk spreads remain low. Emerging market economies are once again receiving capital inflows. Volatility in many financial prices is currently unusually low. Markets appear to be attaching a very low probability to any rise in global interest rates over the period ahead.

Financial conditions overall remain very accommodative. Long-term interest rates and risk spreads remain very low. Emerging market economies are receiving capital inflows. Volatility in many financial prices is currently unusually low. Markets appear to be attaching a very low probability to any rise in global interest rates, or other adverse event, over the period ahead.

In Australia, recent data indicate somewhat firmer growth around the turn of the year, but this resulted mainly from very strong increases in resource exports as new capacity came on stream; smaller increases in such exports are likely in coming quarters. Moderate growth has been occurring in consumer demand. A strong expansion in housing construction is now under way. At the same time, resources sector investment spending is starting to decline significantly. Signs of improvement in investment intentions in some other sectors are emerging, but these plans remain tentative as firms wait for more evidence of improved conditions before committing to significant expansion. Public spending is scheduled to be subdued. Overall, the Bank still expects growth to be a little below trend over the year ahead.

In Australia, growth was firmer around the turn of the year, but this resulted mainly from very strong increases in resource exports as new capacity came on line; smaller increases in such exports are likely in coming quarters. Moderate growth has been occurring in consumer demand. A strong expansion in housing construction is now under way. At the same time, resources sector investment spending is starting to decline significantly. Signs of improvement in investment intentions in some other sectors are emerging, but these plans remain tentative as firms wait for more evidence of improved conditions before committing to significant expansion. Public spending is scheduled to be subdued. Overall, the Bank still expects growth to be a little below trend over the year ahead.

There has been some improvement in indicators for the labour market in recent months, but it will probably be some time yet before unemployment declines consistently. Growth in wages has declined noticeably. If these and other domestic costs remain contained, inflation should remain consistent with the target over the next one to two years, even with lower levels of the exchange rate.

There has been some improvement in indicators for the labour market this year, but it will probably be some time yet before unemployment declines consistently. Recent data showed an increase in inflation, with both headline and underlying measures affected by the decline in the exchange rate last year. But growth in wages has declined noticeably and is expected to remain relatively modest over the period ahead, which should keep inflation consistent with the target even with lower levels of the exchange rate.

Monetary policy remains accommodative. Interest rates are very low and for some borrowers have edged lower over recent months. Savers continue to look for higher returns in response to low rates on safe instruments. Credit growth has picked up a little, including most recently to businesses. Dwelling prices have increased significantly over the past year, though there have been some signs of a moderation in the pace of increase recently. The exchange rate remains high by historical standards, particularly given the declines in key commodity prices, and hence is offering less assistance than it might in achieving balanced growth in the economy. Looking ahead, continued accommodative monetary policy should provide support to demand and help growth to strengthen over time. Inflation is expected to be consistent with the 2–3 per cent target over the next two years. In the Board's judgement, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target. On present indications, the most prudent course is likely to be a period of stability in interest rates .

Monetary policy remains accommodative. Interest rates are very low and for some borrowers have continued to edge lower over recent months. Savers continue to look for higher returns in response to low rates on safe instruments. Credit growth has picked up a little, including most recently to businesses. The increase in dwelling prices has been slower this year than last year, though prices continue to rise. The exchange rate remains high by historical standards, particularly given the declines in key commodity prices, and hence is offering less assistance than it might in achieving balanced growth in the economy. Looking ahead, continued accommodative monetary policy should provide support to demand and help growth to strengthen over time. Inflation is expected to be consistent with the 2–3 per cent target over the next two years. In the Board's judgement, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target. On present indications, the most prudent course is likely to be a period of stability in interest rates.

August 5 2014