Happy anniversary.
It is now a year since the Reserve Bank of Australia Board cut the official cash rate to a historically-low 2.5 per cent, in which time the economy has been flat out trying to hold its ground, let alone take off.
And, the RBA’s analysis suggests, that is unlikely to change any time soon.
In his brief statement announcement the outcome of the Board meeting, Reserve Bank Governor Glenn Stevens said he expected growth to be “a little below trend [around 3 per cent] over the year ahead”.
Put this together the RBA’s view that inflation will remain consistent with the central bank’s 2 to 3 per cent target in the next two years – even if the dollar goes lower – and it suggests interest rates are not going anywhere for quite some time.
But if the prospect of an extended period of very low interest rates has borrowers excited, the reasons why this is likely to be the case are much less reassuring.
Essentially, the RBA has too keep rates low because of economic weakness.
The list of negatives dragging on growth is long, while the index of positives is depressingly brief.
On the plus side, all that investment in new and bigger mines, rail and road links and ports is paying off, and the volume of commodity exports surged early this year. The downside is that the massive pipeline of mining investment has virtually run its course.
Consumers are an important source of growth, and here the picture is equally mixed. Low interest rates are working to encourage people to borrow to buy and build homes, and a strong expansion in housing construction is underway (and the overblown hype about a housing bubble has been shown yet again to be a furphy).
In another promising sign, firms outside the resources sector appear to be brushing off investment ideas, though most are to commit money to expansion plans as they weight for evidence of a sustained lift in demand.
And this is where the picture gets murky.
One of the reasons the RBA is comfortable holding interest rates so low is that wages are going nowhere. In the year to the March quarter, the Australian Bureau of Statistics’ wage price index grew around 2.7 per cent. Over the same period, the headline consumer price index climbed 3 per cent, and even underlying inflation grew more strongly. In essence, household income is slipping behind the rise in living costs.
That is not good news for retailers keen to bump up prices and margins, and it is not likely to get much better for a while.
In the current economic environment, where the unemployment rate sits at 6 per cent and, according to Glenn Stevens, is likely to stay there for “some time yet”, workers have limited bargaining power to push for a pay rise.
Add to this the blow to jobs, investment and confidence delivered by the Federal Budget – and compounded by the political uncertainty as to what will actually be passed by the Senate – and it is not an inspiring outlook.
No wonder that the RBA and the financial markets believe interest rates are not going anywhere for quite some time.
Economy stuck in second
Filed under Analysis
Out-of-step Budget leaves heavy lifting to the RBA
Pity the Reserve Bank.
For several years now, successive governments have displayed a genius for getting the temper of the economic times almost exactly wrong, in the process forcing the central bank to do most of the work to prop up the economy.
Last decade they mortgaged the future by pretending the always-temporary mining boom would last forever, using the revenue windfall on transfers and handouts to families, superannuants and the corporate sector.
Now, just as confidence was returning and the property market had emerged from its post-crisis shell, the Abbott Government has unloaded with the sort of Budget you would expect to see for an economy in danger of over-heating – not one just ticking over.
The extent of the blow to confidence and growth is there in the numbers: a 16 per cent plunge in consumer confidence and the first drop in house prices in more than a year.
If the goal of Abbott and Hockey had been to knock the economy back on its heels, they could hardly have done a better job.
It means that the RBA’s hopes to move the official interest rate off its current “emergency low” have been postponed again, and instead a further rate cut must loom as a possibility.
At its meeting this morning, the RBA Board decided to hold the cash rate steady at 2.5 per cent, and it appears unlikely to be raising it any time soon.
As RBA Governor Glenn Stevens put it: “continued accommodative monetary policy should provide support to demand, and help growth to strengthen over time”.
Concerns that the property market was in danger of becoming overheated have receded for the time being, and inflation is unlikely to take off. In Fact, Mr Stevens thinks it will remain consistent with the central bank’s 2 to3 per cent target band “over the next two years”.
Instead, the economy might need more monetary policy air pumped into its tires – a move that might also, conversely, help deflate the stubbornly elevated exchange rate.
The sustained high value of the dollar is something the RBA, along with many others, remains bemused by: “The exchange rate remains high by historical standards, particularly given the further decline in commodity prices,” Mr Stevens said.
All of a sudden, a rate cut becomes tempting again.
But the bigger picture concern is that a historically low interest rate means the central bank has that much less ammunition if the global recovery falters and another crisis strikes.
And anyone who thinks that is improbable has obviously been hibernating in Antartica watching the glaciers melt.
Filed under Uncategorized
Nothing to see here, move along
The Reserve Bank of Australia is dangling a prolonged period of record low interest rates in front of businesses and consumers as it tries to foster economic growth in the face of what is expected to be an austere Federal Budget.
The release of the National Commission of Audit report has amped up concerns, particularly among retailers and other businesses directly dependent on household spending, that a severe Budget will crunch spending and stall growth.
While the forthcoming Budget would undoubtedly have figured in the discussions of the RBA Board, Governor Glenn Stevens was content to repeat his observation from last month that “public spending is scheduled to be subdued”.
Instead, the central banker drew attention to developments in the labour market, and their implications for inflation and, hence, interest rates.
The surprise drop in the unemployment rate in March to 5.8 per cent had some speculating that the labour market was on the improve, raising the prospect that monetary policy might soon have to tighten.
But the RBA thinks this outlook is premature.
Mr Steven admitted that there were signs conditions in the labour market were improving, but cautioned “it will probably be some time yet before unemployment declines consistently”.
Budget cuts to the public service and Commonwealth spending (including welfare payments) are only likely to prolong the period of softness in the labour market.
While this is bad news for job seekers and those hoping to trade up to a better position, weak employment growth has had a silver lining.
As Mr Stevens explains, the slack labour market has helped keep a lid on wages, which in turn has limited the ability of retailers to jack up their prices.
The result is that the cost of domestically-priced goods and services (often the driver of inflation) has been contained, and the RBA Governor said “that should continue to be the case over the next one to two years, even with lower levels of the exchange rate”.
What that means is that the Reserve Bank does not see inflation breaching its 2 to 3 per cent target band in the next two years, giving it ample room to hold interest rates down for an extended period.
While it is unlikely that they will still be this low in early 2016, it could well be late this year or even early 2015 before the RBA feels compelled to begin edging them up – notwithstanding the surge in house prices in the major cities.
Filed under Uncategorized
The dollar giveth, and taketh away…
In economics, as in most areas of life, no news is entirely good or entirely bad.
The renewed vigour of the currency in recent months has frustrated hopes of a competitive boost for non-mining exporters and import-competing businesses.
But as the Government, the Reserve Bank of Australia and business groups fret over the sustained strength of the dollar (which has been above US90 cents for the last six weeks), it has also been working – along with tepid global growth – to help hold the cost of imports down.
This is made clear in the breakdown of inflation figures between tradable and non-tradeable items.
The cost of tradeable goods and services – that is, those items whose prices are largely determined on the world market – rose by 0.4 per cent in the March quarter. While the cost of fuel, tobacco and medicines all went up, these rises were offset to a considerable extent by cheaper furniture, clothes, shoes (thank you, Boxing Day sales) and overseas holidays.
In the same period, the cost of goods and services whose prices are largely determined by the domestic market, climbed by 0.7 per cent, driven by rising electricity charges, a seasonal jump in school and university fees, and annual cut in the percentage of patients qualifying for Medicare and PBS subsidies.
The ace in the hand for the RBA as it contemplates the official inflation numbers is that wages growth is being held well in check by soft economic conditions and elevated unemployment. The Wage Price Index grew by 2.6 per cent in the year to the December quarter.
While an underlying inflation rate of 2.65 per cent is above the mid-point of the central bank’s 2 to 3 per cent target band, there is little in the March quarter CPI figures that are likely to surprise or alarm the RBA.
Combined with the fact that wage pressures are moderate, and the possibility that the currency may stay higher for a little while yet, there is nothing in the inflation data to suggest the RBA Board needs to begin pushing up interest rates yet.
Some of the CPI detail:
Headline inflation: up 0.6 qtr/2.9 annual
Underlying inflation: up 0.55 qtr/2.65 annual
Main increases(%)
Tobacco – 6.7
Secondary school – 6
Medicine – 6.1
Fuel – 4
Vegetables – 3.3
Electricity – 1.4
Main falls(%) Furniture – down 4.3
Clothing and footwear – down 2.1
Internat. and domestic travel – down 2.4
Filed under Uncategorized
Outlier 