Tag Archives: monetary policy

July 24, 2013 · 1:57 am

Low inflation gives room for rate cut, but no trigger

The Reserve Bank of Australia has ample room to cut interest rates if needed following evidence that inflation was muted in the June quarter, but an August rate cut remains unlikely.

While the central bank appears in no rush to ease monetary policy from its already very-low 2.75 per cent, confirmation that headline inflation grew by just 0.4 per cent in the June quarter, pushing annual growth down by 0.1 of a percentage point to 2.4 per cent, suggests it could cut the cash rate further without immediately feeding a dangerous build-up in inflation.

But the Reserve Bank is likely to keep a wary eye on underlying price pressures, particularly as the weaker dollar means the cost of imports is set to grow more sharply.

Official figures show underlying inflation grew by 0.6 per cent in the June quarter, holding the annual rate steady at 2.4 per cent – just below the middle of the central bank’s 2 to 3 per cent target band.

The most significant price increases in the quarter were for hospitals and medical services (up 3.4 per cent), tobacco (3 per cent), furniture (4.8 per cent) and rents (1.1 per cent).

These were largely offset by falls in the cost of domestic tourism (down 4 per cent) and cheaper fuel (down 3 per cent).

There is nothing in the result that will surprise the RBA, which has said it expects inflation to remain “consistent with the target” for the foreseeable future.

The central bank is likely to closely monitor the evolution of inflation pressures from overseas following the rapid depreciation of the dollar since April.

This effect is yet to show up consistently in the official inflation numbers.

The average price of tradeable goods and services – which comprise about 40 per cent of the consumer price index – rose by just 0.3 per cent in the June quarter, while average inflation among non-tradeable products was 0.5 per cent, mainly due to the pick up in housing activity.

The extent to which the high dollar and fierce international competition has helped hold inflation down was underlined by figures showing tradeables inflation fell 0.7 per cent in the 12 months to June, compared with a 4.3 per cent rise in non-tradeable prices.

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July 16, 2013 · 3:04 am

No smoking gun for August rate cut

Investors anticipating a cut in Australia’s official cash rate to 2.5 per cent next month look set for disappointment.

The minutes of the Reserve Bank of Australia’s 2 July Board meeting suggest a central bank happy with its current policy settings, rather than itching to provide another dollop of stimulus to the economy.

Speculation about a rate cut took flight last week when official figures showed the unemployment rate edged up to 5.7 per cent in June.

Market expectations of an August rate cut had already been edging higher before the labour market update was released, but the 0.1 percentage point rise in the jobless rate was enough to convince several commentators, and more than a few investors, that the case for further monetary policy easing had been made.

But the RBA Board Minutes released today should give all some pause for thought.

They show that the central bank had anticipated that softness in the labour market could see the unemployment rate move higher.

Looking beyond the monthly volatility in the jobs numbers, the RBA saw that annual employment growth – at a little more than 1 per cent – was not enough to keep the jobless rate down.

It noted that leading indicators pointed to only modest employment growth in coming months, suggesting that the “gradual upward trend” of unemployment observed in the past year was likely to continue.

The Minutes included to other important signals that show the Reserve Bank is still some way from being convinced of the need for a further rate cut.

Yes, domestic economic growth is below average, and yes, the mining investment boom has probably peaked, and yes, consumption growth has been modest, and yes, the outlook for non-mining investment is uncertain.

But the central bank thinks the housing market is gradually building momentum, and that the recent 12 per cent depreciation in the Australian dollar has both helped offset the fall in global commodity prices for Australian miners and given a boost to exporters. Added to this, inflation pressures remain contained and labour costs have actually declined.

All in all, the RBA sees little need for haste in adjusting monetary policy, as the following excerpt from the Minutes attests: “The effects of lower interest rates were apparent across a range of indicators and, given the lags involve din the transmission of monetary policy, this process has further to run.”

The central bank sees the floating exchange rate as doing at least some of the policy work for it. The Minutes said “it was possible that the exchange rate would depreciate further [it has, dipping briefly below US90 cents earlier this week], which would help foster a rebalancing of growth in the economy”.

For the benefit of those not yet convinced that a rate cut is not imminent, the Minutes added “given the exchange rate adjustment that was occurring, and with the substantial degree of monetary policy stimulus already in place, members assessed that the current stance of policy to be appropriate for the time being”.

For those looking for the smoking gun on monetary policy, the unemployment rate is not it, and nor is the drop off in mining industry investment.

What is most likely to make the RBA move again is a sustained relapse in housing activity, a reversal in the US economic recovery or a much harder than expected landing for the Chinese economy.

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July 2, 2013 · 4:58 am

Dollar dive staves off rate relief

Expectations that the dollar has further to fall has helped convince the Reserve Bank of Australia to keep interest rates on hold despite concerns about sluggish growth in the economy.

In a widely anticipated decision, the RBA Board has held the cash rate steady at 2.75 per cent for a second consecutive month as it assesses the effect of a 10 per cent slide in the currency against the greenback in the past three months on prospects for growth.

In a bearish assessment on the outlook for the currency following the Board meeting, RBA Governor Glenn Stevens said it was “possible” the dollar had further to fall.

The weaker dollar, which was trading at around US92 cents just before the Board’s decision was announced, is expected to encourage a lift in activity in manufacturing, higher education, tourism and other trade-exposed sectors of the economy.

Mr Stevens said that if it continued to slide, it would “help foster a rebalancing of growth in the economy”.

But the central bank has not ruled out further rate cuts, indicating that the moderate outlook for inflation – which it expects to hold steady at around 2.5 per cent “over the next one to two years” – leaves room to move the cash rate lower.

“The Board judged that the inflation outlook, as currently assessed, may provide some scope for further easing, should that be required to support demand,” Mr Stevens said.

The RBA Board stood by its assessment of a month ago that although the global economy was currently growing at a subdued pace, it was likely to strengthen next year.

Markets have been rattled in the past month by signs of a sustained recovery in the US economy, which has fuelled speculation that the US Federal Reserve may begin winding down its extraordinary stimulus efforts by late this year.

Though the latest US growth figures were revised down last week, there is mounting confidence that a sustained recovery in the world’s largest economy is underway.

But sentiment has been hurt by evidence of a developing credit squeeze in the Chinese economy as authorities act to curb lending and encourage greater demand-driven rather than investment-driven growth.

Closer to home, the RBA is conscious of the difficult transition underway in the Australian economy as the support for growth from massive mining investment tapers off, while activity in other sectors is yet to pick up, leaving the country vulnerable to downturn.

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June 7, 2013 · 1:58 am

(Tell me why) I hate Tuesdays

The Reserve Bank of Australia rightly takes a considered approach to economic data.

While markets and the media are sent into a frenzy over small shifts in the dollar or the unemployment rate, RBA officials usually emphasise the importance of interrogating the figures and using an accumulation of information – rather than a single data point – to help assess what exactly is going on in the economy.

Such an approach is understandable – indeed, necessary – when each decision made will directly affect the economic fortunes of more than 23 million people, as well as having significance for the international economy.

Which begs the question – why does the RBA Board meet on the first Tuesday of every month (except January), rather than the Wednesday or – as Outlier suggests – the Thursday.

Many of the major data releases from the Australian Bureau of Statistics, including the national accounts, the consumer price index and the monthly labour market reading, are scheduled for Wednesdays and Thursdays, meaning that often the RBA Board meets without access to the latest ABS figures.

This week was a case in point.

The day after the RBA Board decided to leave interest rates on hold, the national accounts for the March quarter were released, showing gross domestic product increased by just 0.6 per cent in the March quarter, holding the annual growth rate down at 2.5 per cent for the third consecutive quarter.

The result was consistent with the observation made by RBA Governor Glenn Stevens after the Board meeting that growth in the past year had been “a bit below trend” (which is generally considered to be around 3.25 to 3.5 per cent).

But the soft growth number hasn’t helped convince people that the Reserve Bank is right when it says recent rate cuts will help push growth toward 3 per cent next year.

Instead, the growing expectation is that the central bank will have to cut the cash rate further.

All of which makes the RBA Board appear – rightly or wrongly – out of step with developments in the economy.

And, when it comes to monetary policy, appearances matter.

The demeanor of a central bank and what is says can be as influential as what it actually does with the cash rate. Just ask Ben Bernanke, Mario Draghi or Mervyn King.

So, even if having the March quarter national accounts figures at its fingertips would not have changed the decision of the RBA Board on Tuesday, the perception that it made its call without taking into account the most recent national growth data is not helpful for its cause.

If the regular Board meeting was shifted to a Thursday instead of Tuesday, it would mean that it would have access to the most recent data possible when coming to its monthly policy decisions.

And, every three months, it would have access to the latest official growth and inflation figures for its cash rate deliberations.

For the sake of perceptions, this would be reassuring for everyone.

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