by
Dr. Stephen Nash | Mar 20, 2013
In March, the RBA left rates unchanged, at 3.00%, broadly as the market expected. In the Minutes issued yesterday, the RBA continued to develop the more dovish tone that began in the September minutes, as the high AUD plays havoc with the export sector and despite the recent surprise in employment figures. While markets have given up on an easing, the RBA continues to appear ready to move later this year. Recent elevations in the residential auction clearance will, however, require careful assessment by the RBA. Hence, easing should come at a slower rate than the market expects.
More specifically, this note provides a summary and comments on the following three main releases, as they were released by the RBA:
(i) a recent speech by Christopher Kent,
(ii) a speech by Philip Lowe, and
(iii) RBA board minutes released on 19 March.
Kent
RBA guidance continued with the release of a speech by Christopher Kent entitled ‘Recent Developments in the Australian Housing Market’, Christopher Kent, Assistant Governor (Economic) of the RBA, Address to The Australian Institute of Building, Sydney - 14 March 2013.Kent indicated that some signs of a pick-up in construction were evident as well as some price appreciation in established housing markets. As the prior easing of monetary policy has been supporting the housing market, construction growth is forecast to continue, yet the question of whether this growth will support an economy that is transitioning from mining-led growth remains unclear. As Kent indicated below,
Let me conclude then by drawing some of these threads together. A range of indicators suggest that low interest rates have been supporting the established housing market, and prices have been moving higher in many markets, though they remain below earlier peaks in most. Also, finance is available on reasonable terms for households. With these conditions in place, dwelling construction is beginning to pick up and leading indicators point to further growth in the months ahead. In line with this, our expectation is that there will be a further gradual increase in dwelling construction activity over this year and the next. This moderate growth in dwelling investment will play some role in helping to support a gradual pick-up in economic growth more broadly from what is expected to be a rate a little below trend this year. But it is hard to know exactly how strong the recovery in the housing market might be, so we'll continue to analyse these developments closely over the period ahead (Christopher Kent, Assistant Governor (Economic), Address to The Australian Institute of Building, Sydney - 14 March 2013)
As we approach the budget the scope for fiscal policy to assist with the transition from mining-led growth is falling every day.
Lowe
Philip Lowe Guy, Deputy Governor of the RBA in a speech entitled ‘Internal Balance, Structural Change and Monetary Policy’, dated 19 March 2013 indicated that Australia still faces challenges in adjusting to structural changes. While monetary policy had assisted with providing a stable inflation environment for the internal rebalancing of the Australian economy to proceed Lowe indicated that a ‘critical question for the outlook is the strength of [the] expected pick-up in non-mining investment’ (‘Internal Balance, Structural Change and Monetary Policy’, Deputy Governor, Address to the Australian Industry Group 13th Annual Economics Forum, in Sydney, dated 19 March 2013).
While some ‘tentative signs of a lift in investment intentions outside the resources sector’ were apparent, the RBA remains unconvinced on the idea that growth will rise enough, in order to offset the anticipated decline in mining-led growth as Lowe indicated,
whether the increases will be sufficient to offset the expected lower levels of mining investment is something that we will be watching very carefully over the months ahead investment’ (‘Internal Balance, Structural Change and Monetary Policy’, Deputy Governor, Address to the Australian Industry Group 13th Annual Economics Forum, in Sydney, dated 19 March 2013).
As the Minutes indicate below the RBA remains prepared to assist economic growth to get back to trend.
RBA minutes
RBA guidance on monetary policy continued with the Minutes of the recent meeting of 5 March, as released on 19 March, for the meeting being, once again, consistent with the recent Statement of Monetary Policy, which was released on 8 February 2013. Here the RBA painted a picture of an economy that needed additional help to transition from mining to non-mining led growth.
Minutes: Global assessment
Overall, the assessment of global growth was consistent with that given over the recent months, with assessment that regional and Chinese growth has stabilised, while US growth continues and European growth continues to sag:
Indicators suggested that growth of the Chinese economy had stabilised at a sustainable pace, although activity data were limited over the past month and the available data were difficult to interpret owing to the Spring Festival holiday. The Chinese authorities had expressed some concerns about the pace of house price growth. Financial conditions in China remained accommodative, with strong growth in total financing over recent months, much of which had been from sources other than banks' balance sheets. Output growth in India had picked up somewhat from low rates.
While growth in the US had improved modestly, the RBA noted that sequester was fully implemented, against the expectations of “most” forecasters,
Members noted that the US economy appeared to have continued to grow moderately, with further improvement in the housing market, and continued growth in payrolls. The automatic government spending cuts came into force in full from 1 March, in contrast to most forecasters' earlier expectation that not all of the cuts would be implemented.
Minutes: Domestic assessment
Generally, the RBA indicated it expected growth would remain a little below trend, as the non-mining sector was expected to not provide enough strength to offset the peak in the mining sector, although the construction sector was showing some signs of growth. Moreover the high AUD weighed on non-mining growth:
The available partial indicators suggested that the Australian economy grew at close to trend pace over the year to the December quarter. While mining investment had made a further contribution to growth, it appeared to be approaching its peak. Survey-based measures of business conditions were below average and non-mining business investment had, to date, remained subdued. That was likely to continue in the near term, but recent data suggested a modest increase in non-mining business investment was in prospect during 2013/14. There were signs that dwelling investment was growing and it was likely to continue to do so at a moderate pace in the period ahead, and exports were strengthening. Overall, the staff's assessment remained that GDP growth would be a little below trend this year, with a pick-up after that.
Combined with the fairly soft outlook for domestic growth, the inflation outlook was still very much contained, as the RBA indicated
Members noted that further moderation in the year-ended growth of wages, evident in recent data, was consistent with the staff forecast of inflation remaining around the middle of the target. Given that the effect of the earlier exchange rate appreciation had waned, the inflation forecast assumed a combination of ongoing productivity growth and wage growth remaining around the more moderate pace seen in recent quarters. The latter was consistent with the softer conditions in the labour market evident since mid 2012.
Minutes: Financial markets
While financial markets remained stable, the impact of the Italian elections as a sign of discord in Europe, was noted by the RBA. An eventual decline in the interest rate spread between term deposits and bank bill was anticipated, as the RBA noted,
Members observed that spreads on corporate debt generally remained low, following a significant contraction globally during the second half of 2012. Domestically, there had been a substantial volume of asset-backed debt issued during February, with spreads on residential mortgage-backed securities reaching their lowest levels since prior to the financial crisis. Funding conditions for Australian banks remained as favourable as they had been for some months. In time, this improved environment should see some moderation in banks' strong demand for deposits but, for the present, spreads between deposits and comparable wholesale benchmarks remained elevated.
Minutes: Considerations for monetary policy
Generally the RBA indicated the global growth forecast had improved, although significant risks still remained in Europe. Generally the following two factors drive the current easing stance of monetary policy:
- the outlook for growth remains subdued, or slightly below trend, and
- the outlook for inflation remains constrained.
Both factors continue to support additional easing at some point. While it is remains unusual for the RBA to indicate the direction of the next movement in monetary policy, the admission that expected domestic GDP growth outlook remains sub-trend over the medium term, provides a central rationale for this unusual guidance. As the RBA seeks to maintain trend growth the RBA indicated in the following,
Given the economic outlook, the Board considered it appropriate that the stance of monetary policy should be accommodative. After six cash rate reductions since late 2011, lending rates were close to the historically low levels of 2009 and clearly below normal levels. Interest-sensitive parts of the economy continued to show signs of responding to these low rates and it was likely that this still had further to run, though the exchange rate remained high. With inflation likely to remain around the middle of the inflation target, members judged that there would be scope to cut the cash rate further to support demand, should that be necessary. At this meeting, the Board's assessment was that, while further reductions may be required, on the information currently to hand it was appropriate to hold rates steady, and to assess further developments over the period ahead (emphasis added).
Conclusion
In the minutes released yesterday the RBA indicated that the domestic economy is expected to grow below trend and that the inflation rate outlook remains very much contained. Signs of growth in the construction sector remain apparent, as evident in the Kent and Lowe speeches, yet the RBA is not yet convinced that such growth will be adequate to offset a decline in mining-led growth. As equity market related consumer sentiments fades, the way forward for an easing in the second half of 2013 should materialise. We estimate that cash rates will average around 2.75% for 2013 and end the year around 2.50% which means that investors will need to obtain better returns than cash in the fixed income markets while avoiding the turbulence in equity markets.