by
Dr. Stephen Nash | Jun 05, 2013
While the RBA has more to do, more easing to deliver, the scope for additional easing is limited at this time. Lower rates are fuelling established house price growth, not the construction that the RBA really wants. Given that the banking system has discovered that property lending can be risky, they have recently retreated from providing funding to the property development sector; especially after the GFC. Until the banks allow access to credit for the construction industry, there is little that will transpire from RBA easing. One suspects that competitive pressures will lure banks back to a better type of property development lending; better than the aggressive lending of years past. This will be a welcome development from the current situation, however it is probably some way off at this time.
As short term interest rates compress towards the medium term rate of inflation, at around 2.50%, we recommend that clients get in front of the compression in interest rates that will occur as yields are now set to fall further.
Statement
The following points are evident from the statement:
- Global growth: Global growth comments were much the same as the prior meeting, where the RBA noted that global growth was somewhat lower than trend. As the RBA indicated,
Information becoming available since the previous meeting is consistent with global growth running a bit below average this year, with reasonable prospects of a pick-up next year. Commodity prices have declined from their peaks but, overall, remain at high levels by historical standards. Inflation has generally moderated over recent months and monetary policy has been eased further in a number of countries.
- Financial market developments: In general, the assessment of financial market developments was largely unchanged from the prior statement, where a growing recovery in sentiment became apparent. International financial conditions were seen as “very accommodative”. While accommodative, financial conditions need to remain so, in order to stimulate growth.
- Domestic economic developments. Existing easing is beginning to gain traction, in terms of an increased demand for finance, and some improvement in established house prices can be expected, yet since banks no longer lend to property developers, construction is not expected to increase. Some evidence of prior easing were beginning to be felt, and the RBA acknowledged as such yesterday, where the RBA said,
The easing in monetary policy over the past 18 months has supported interest-sensitive areas of spending and has been reflected in portfolio shifts by savers and higher asset values. Further effects can be expected over time. The pace of borrowing has thus far remained relatively subdued, though recently there have been some signs of increased demand for finance by households.
A welcome decline in the Australian dollar was observed by the RBA, although most of the movement in the Australian dollar is driven by the recent strengthening of the US dollar. Easing of monetary policy probably has had, is having, and probably will continue to have a limited impact on the level of the Australian dollar, as the global movement in the US dollar remain more important at this time. As the RBA note,
The exchange rate has depreciated since the previous Board meeting, although, as the Board has noted for some time, it remains high considering the decline in export prices that has taken place over the past year and a half.
Also, the RBA noted that unemployment has increased of late and that growth has been somewhat below trend, as the RBA note,
In Australia, growth over the past year has been a bit below trend. The outlook published by the Bank last month is for a similar performance in the near term and recent data are consistent with this. The unemployment rate has edged higher over the past year and growth in labour costs has moderated.
- Inflation: Labour costs remained “contained” and even a little “lower” than expected,
Inflation has been consistent with the medium-term target and is expected to remain so over the next one to two years.
- Final paragraph: Here, the RBA noted that further scope for easing is still apparent,
At today's meeting the Board judged that the easier financial conditions now in place will contribute to a strengthening of growth over time, consistent with achieving the inflation target. It decided that the stance of monetary policy remained appropriate for the time being. The Board also judged that the inflation outlook, as currently assessed, may provide some scope for further easing, should that be required to support demand.
Conclusion
More data is needed to assess what the RBA does, however most agree that the next easing is now a matter of time. We have been of this view for some time, and others are now crowding into this view. For us, the real variable is what happens now with the global economy, and the impact of fiscal drag is becoming more apparent This has recently been seen with the latest ISM report, which was the lowest reading for some time, and tends to suggest that the US economy may be beginning to feel the effects of the fiscal drag. More is to come, and the employment report may be pivotal for sentiment, although employment is a lagging indicator. If US growth continues to fall, then there may be a case to further reduce our cash target, from 2.50% to something lower.
As the RBA indicated last time, the final paragraph leaves the door wide open for another easing. However, we would estimate that the next easing might take some time and the third quarter seems about right to us at this point. In Australia, a structurally more conservative consumer is slowing the typical transmission of lower rates to activity at this point, along with a now conservative banking system, and this is what is making the prospect of even further easing tantalisingly close.