[Commsec Research]No new ‘hot buttons’ for Reserve Bank

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No new ‘hot buttons’ for Reserve Bank

Reserve Bank Board meeting

¾ The Reserve Bank Board has left the cash rate at 4.75 per cent for the fifth straight month (covering four formal meetings). The next meeting is on May 3 2011.

¾ If there was a criticism of the accompanying statement it would be that it was exceedingly dull. That is no bad thing – essentially the Reserve Bank is noting that there are no new ‘hot button’ factors. And there are no influences that need to be expressed in a different way to last month. Effectively it is steady as you go.

What does it all mean?

· The Reserve Bank spends a lot of time speaking to businesses so it fully understands what is going on in the community. And no doubt the Bank is increasingly hearing how tough conditions are at present. Consumers aren’t spending; the high Australian dollar is crunching manufacturers and exporters while consumers are increasingly worried about the rising cost of living. Today’s decision to leave rate settings unchanged was one of the easiest decisions that the Reserve Bank Board has had to make.

· There is no immediate need to change rate settings – either up, or down. The economy is growing slightly below the longer-term trend pace while underlying inflation is under control. Mining and engineering construction sectors may be doing well, but a raft of other sectors are struggling.

· Looking ahead, there are plenty of grounds for optimism. Businesses plan to invest and are still looking to take on staff, while firmer wages, stable interest rates and a healthy job market should lead to higher consumer spending. Still, businesses and consumers don’t have to spend. It depends on their confidence levels. The Reserve Bank can’t be too predictive in the current environment, but it certainly must remain watchful about the cross-currents in the economy.

· CommSec still believes that the next move in rates will be up, but it’s looking increasingly likely that rates won’t be rising until the second half of the year. However for the Reserve Bank to start lifting rates again, it will need to see a substantial improvement in the business environment, especially consumer spending.

· The accompanying statement confirms that the Reserve Bank is still more hawk, rather than dove. That is, the Reserve Bank is still of the view that the economy is likely to strengthen and that justifies the mildly restrictive monetary policy stance.

Interest rate decision and past cycles

· The Reserve Bank Board has left the cash rate at 4.75 per cent. In October 2009 the cash rate stood at a 49-year low of 3.00 per cent. But then the RBA embarked on a process to remove the emergency stimulus, lifting the cash rate by a quarter of a percent in October, November and December 2009, and then in March, April, and May 2010 and following it up with a move in November.

· In the last rate-cutting cycle the cash rate fell to a low of 4.25 percent in December 2001. In the two previous rate-cutting cycles, the cash rate fell to lows of 4.75 per cent.

· In response to funding pressures, banks have been forced to lift rates above the cash rate over the last year. As a result, the Reserve Bank now looks more closely at the variable housing rate to gauge how close rates are to “normal”. Currently the average bank variable housing rate stands at 7.80 per cent, well above the long-term average or “normal” rate of 7.15 per cent.

· Financial markets have priced in a 50 per cent chance of a 25 basis point rate hike in the next year. Most economists tip 2-3 rate hikes of that magnitude over the same period. Conditions can change quite quickly – a case in point has been sharemarket sentiment after the Japanese earthquake. But it is worth consumers and borrowers factoring in the potential for higher rates.

What are the implications of today’s decision?

· The Reserve Bank remains firmly in ‘wait-and-see’ mode on interest rates. Policy remains “mildly restrictive” – a stance that the Reserve Bank believes is ‘appropriate’ given the outlook. But there are still few signs that the stance needs to be changed.

· Consumer-focussed businesses such as retailers, builders and real estate agents would clearly like to see the Reserve Bank become more dovish. But the Bank remains fixated on the risks posed by high export prices and rising incomes, a stance that would only change if the economic outlook in China was to weaken markedly.

· Today’s decision has few implications for the currency. The Aussie dollar would only soften, and thus boost prospects for exporters, tourism operators and manufacturers, if foreign central banks step up attempts to “normalise” interest rates – lift rates to more ‘normal’ levels.

· Consumers and businesses alike are still shell-shocked by the string of natural disasters. As a result caution reigns, and the Reserve Bank is likely to face an extended period on the interest rate sidelines. Saving is in vogue, not spending, with most people keen to secure the best investment rates rather than cheapest loan deals.

· The focus now shifts to the next speech of the Reserve Bank Governor – delivered in the early morning Australian time on April 14.

Comparing the two most recent statements

· The statement from today’s April 2011 meeting is below.

MEDIA RELEASE No: 2011-06 Date: 5 April 2011 Embargo: For Immediate Release STATEMENT BY GLENN STEVENS, GOVERNOR MONETARY POLICY At its meeting today, the Board decided to leave the cash rate unchanged at 4.75 per cent. The global economy is continuing its expansion, led by very strong growth in the Asian region. The recent disaster in Japan will have a noticeable effect on Japanese production in the near term, although the impact on the broader Asian region is expected to be limited. Commodity prices, including oil prices, have risen over recent months, pushing up measures of consumer price inflation in many countries. A number of countries have been moving to tighten their monetary policy settings. Overall, though, financial conditions for the global economy remain accommodative. Australia's terms of trade are at their highest level since the early 1950s and national income is growing strongly. Private investment is picking up, mainly in the resources sector, in response to high levels of commodity prices. In the household sector thus far, in contrast, there continues to be caution in spending and borrowing, and a higher rate of saving out of current income. The natural disasters over the summer have reduced output and the resumption of coal production in flooded mines is taking longer than initially expected. Production levels should, however, recover over the months ahead, and there will be a mild boost to demand from the rebuilding efforts as they get under way. Asset values have generally been little changed over recent months and overall credit growth remains quite subdued, notwithstanding evidence of some greater willingness to lend. Business balance sheets generally are being strengthened, and the run-up in household leverage has abated. Growth in employment has moderated over recent months and the unemployment rate has held steady at 5 per cent. Most leading indicators suggest further growth in employment, though most likely at a slower pace than in 2010. Reports of skills shortages remain confined, at this point, to the resources and related sectors. After the significant decline in 2009, growth in wages has returned to rates seen prior to the downturn Inflation is consistent with the medium-term objective of monetary policy, having declined significantly from its peak in 2008. These moderate outcomes are being assisted by the high level of the exchange rate, the earlier decline in wages growth and strong competition in some key markets, which have worked to offset large rises in utilities prices. Production losses due to weather are temporarily raising prices for some agricultural produce, which will boost the March quarter CPI, but these prices should fall back later in the year. Overall, looking through these temporary effects, the Bank expects that inflation over the year ahead will continue to be consistent with the 2–3 per cent target. At today's meeting, the Board judged that the current mildly restrictive stance of monetary policy remained appropriate in view of the general macroeconomic outlook.

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