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Reserve Bank keeps powder dry

Reserve Bank keeps powder dry

Reserve Bank Board meeting

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By Expert Panel 07.04.2015

Reserve Bank Board meeting

 The cash rate has left at a record low of 2.25 per cent. The door has been left open to another rate cut.

What does it all mean?

 Rate cut or no rate cut, interest rates have never been lower. Looking out across the yield curve to 10-year swaps (10-year fixed rate loans for business), arguably interest rates haven’t been this low. Perhaps if you went back to the early 1950s you could find lower rates, but there wasn’t the raft of borrowing options.

 The key question is whether low interest rates still have a role to play in boosting economic growth. And this is a question that the Reserve Bank Board is seriously discussing. Minutes from the March Board meeting show:

 “Members discussed the extent to which accommodative monetary policy and ongoing strength in housing market activity would support consumption growth in the near term. They noted that the interest payments made by borrowers are significantly larger than the income received by holders of interestbearing 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.”

 It’s always important to note that while there are still economy-wide benefits from cutting interest rates, some groups are actually made worse off when the Reserve Bank cuts the cash rate. The National Centre of Social and-Economic Modelling (NATSEM) have estimated that households where occupants are over 65 years of age, were actually $29 a year worse off as a result of the February rate cut. And NATSEM note “Overall, 54 per cent of households gain from a reduction in interest rates. Around 45 per cent are worse off and one per cent is not affected.”

 The Reserve Bank didn’t cut rates today because it had no reason to – there was no “smoking gun”, no urgency to cut rates again. In fact today’s economic data may have prevented a rate cut at the 11th hour. Retail spending was robust in February and the March new car sales figures were the strongest for any March month. These are hardly the statistics of an economy struggling.

 There were few changes in the wording of the statement – eight short paragraphs. One interesting change was on the Aussie dollar: “Further depreciation seems likely, particularly given the significant declines in key commodity prices.” CommSec expects the Aussie dollar to be at US70c at the end of the year.

Perspectives on interest rates

 The last rate cut was in February 2015 (25 basis points), taking the cash rate to a record low of 2.25 per cent.

 There have been nine rate cuts since November 2011.

 The Reserve Bank had previously lifted rates seven times from October 2009 to November 2010 – a total of 1.75 percentage points, from 3.00 per cent to 4.75 per cent.

What are the implications of today’s decision?

 Has the Reserve Bank finished with cutting rates? Whilever inflation is contained and the economy is growing at a slower than “normal” pace, the Reserve Bank will keep interest rate cuts on the radar screen. But it will also step up its research to ensure that rate cuts don’t end up having perverse effects on the economy – that is, causing people to lose confidence and stop spending.

 As we stressed last month, the fundamental factor holding back the Australian economy is confidence. Broadly, so-called economic fundamentals remain favourable. Inflation is low, interest rates are low, the budget deficit is still only around 2.5-3.0 per cent of GDP and home building is at record highs. Consumers and businesses just need more confidence to spend, invest and employ. And ultimately that requires our politicians to work constructively for the good of the nation. If it requires compromise to achieve agreement and thus defuse damaging conflicts, then so be it.

 CommSec expects that rates will fall one last time – a quarter of a percentage point reduction in the cash rate to 2.00 per cent in May. At the May Board meeting the Reserve Bank will have the latest data on inflation, another set of jobs figures, and more information on how home prices are tracking.

 There is no rush. The Reserve Bank would like to help the economy along with more stimulus because growth is below “normal”. But it must be confident another rate cut would do some good, not harm the economy.

Craig James, Chief Economist, CommSec

Comparing the two most recent statements

 The statement from the March 2015 meeting is on the left; the statement from today’s April 2015 meeting is on the right. Emphasis has been added to significant changes in the wording in the statements.

Media Release

No: 2015-03

Date: 3 March 2015

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 2.25 per cent.

Growth in the global economy continued at a moderate pace in 2014. A similar performance is expected by most observers in 2015, with the US conomy continuing to strengthen, even as China’s growth slows a little from ast year’s outcome.

Commodity prices have declined over the past year, in some cases sharply.

The price of oil in particular has fallen significantly. These trends appear to reflect a combination of lower growth in demand and, more importantly, ignificant increases in supply. The much lower levels of energy prices will act o strengthen global output and temporarily to lower CPI inflation rates.

Financial conditions are very accommodative globally, with long-term borrowing rates for several major sovereigns at all-time lows over recent months. Some risk spreads have widened a little but overall financing costs for creditworthy borrowers remain remarkably low.

In Australia the available information suggests that growth is continuing at a below-trend pace, with domestic demand growth overall quite weak. As a result, the unemployment rate has gradually moved higher over the past year.

The economy is likely to be operating with a degree of spare capacity for some time yet. With growth in labour costs subdued, it appears likely that inflation will remain consistent with the target over the next one to two years, even with a lower exchange rate.

Credit is recording moderate growth overall, with stronger growth in lending to investors in housing assets. Dwelling prices continue to rise strongly in Sydney, though trends have been more varied in a number of other cities over recent months. The Bank is working with other regulators to assess and contain risks that may arise from the housing market. In other asset markets, prices for equities and commercial property have risen, in part as a result of declining long-term interest rates.

The Australian dollar has declined noticeably against a rising US dollar, though less so against a basket of currencies. It remains above most estimates of its fundamental value, particularly given the significant declines in key commodity prices. A lower exchange rate is likely to be needed to achieve balanced growth in the economy.

At today’s meeting the Board judged that, having eased monetary policy at the previous meeting, it was appropriate to hold interest rates steady for the time being. Further easing of policy may be appropriate over the period ahead, in order to foster sustainable growth in demand and inflation consistent with the target. The Board will further assess the case for such action at forthcoming meetings.

 

Media Release

No: 2015-05

Date: 7 April 2015

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 2.25 per cent.

Moderate growth in the global economy is expected in 2015, with the US economy continuing to strengthen, even as China's growth slows a little from last year's outcome.

Commodity prices have declined over the past year, in some cases sharply.

The price of oil in particular is much lower than it was a year ago. These trends appear to reflect a combination of lower growth in demand and, more importantly, significant increases in supply. The much lower levels of energy prices will act to strengthen global output and temporarily to lower CPI inflation rates. Prices for key Australian exports have also been falling and therefore Australia's terms of trade are continuing to decline.

Financial conditions are very accommodative globally, with long-term borrowing rates for several major sovereigns at all-time lows. Financing costs for creditworthy borrowers remain remarkably low.

In Australia the available information suggests that growth is continuing at a below-trend pace, with overall domestic demand growth quite weak as business capital expenditure falls. As a result, the unemployment rate has gradually moved higher over the past year. The economy is likely to be operating with a degree of spare capacity for some time yet. With growth in labour costs subdued, it appears likely that inflation will remain consistent with the target over the next one to two years, even with a lower exchange rate.

Credit is recording moderate growth overall. Growth in lending to investors in housing assets is stronger than to owner-occupiers, though neither appears to be picking up further at present. Lending to businesses, on the other hand, has been strengthening recently. Dwelling prices continue to rise strongly in

Sydney, though trends have been more varied in a number of other cities. The Bank is working with other regulators to assess and contain risks that may arise from the housing market. In other asset markets, prices for equities and commercial property have risen, in part as a result of declining long-term interest rates.

The Australian dollar has declined noticeably against a rising US dollar over the past year, though less so against a basket of currencies. Further depreciation seems likely, particularly given the significant declines in key commodity prices. A lower exchange rate is likely to be needed to achieve balanced growth in the economy.

At today's meeting the Board judged that it was appropriate to hold interest rates steady for the time being. Further easing of policy may be appropriate over the period ahead, in order to foster sustainable growth in demand and inflation consistent with the target. The Board will continue to assess the case for such action at forthcoming meetings.

https://youtu.be/Tj4vPabmvGI 

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