Minutes of the Monetary Policy Meeting of the Reserve Bank Board
Sydney – 4 December 2012
Glenn Stevens (Chairman and Governor), Philip Lowe (Deputy Governor), Martin Parkinson PSM (Secretary to the Treasury), John Akehurst, Jillian Broadbent AO, Roger Corbett AO, John Edwards, Heather Ridout, Catherine Tanna
Guy Debelle (Assistant Governor, Financial Markets), Christopher Kent (Assistant Governor, Economic), Jonathan Kearns (Head, Economic Analysis Department), Anthony Dickman (Secretary), Peter Stebbing (Deputy Secretary)
International Economic Conditions
Data released over the past few months suggested that global economic conditions had, on balance, been a little more positive after weakening earlier in the year.
Members noted that a range of data on the Chinese economy suggested that growth there had stabilised. Fiscal policy easing, including support for infrastructure spending, and improved conditions in the residential property market had supported growth in industrial production and demand for bulk commodities. Exports had continued to expand, particularly to the United States, following weakness in the middle of the year.
Economic activity in the United States had continued to grow moderately. Members observed that consumer sentiment had improved, consistent with employment growth picking up to a moderate pace and better conditions in the housing market. There was still considerable uncertainty as to how, and to what extent, the ‘fiscal cliff’ in early 2013 would be addressed by policymakers. This uncertainty appeared to be weighing on business sentiment, with indicators of investment, in particular, remaining subdued.
The Japanese economy had contracted in the September quarter, with notable weakness in exports, while activity in the services sector had been little changed. In the other higher-income economies in east Asia, growth remained weak. However, for the lower-income economies in the region, growth remained close to long-run averages.
Economic activity in the euro area had contracted further, with slow growth in Germany and France, while the crisis economies continued to contract. Several governments in the region, including those of France and Greece, had introduced additional policies to address competitiveness and fiscal challenges, although these challenges remained substantial.
Members noted that, overall, global commodity prices were little changed since the previous Board meeting. Spot prices for coal had picked up slightly after falling over most of the year. Base metals prices had risen, while rural prices were little changed and iron ore prices had recorded a modest decline. The terms of trade fell in the September quarter and were likely to have declined further in the December quarter, to be around 15 per cent below their peak in 2011.
Domestic Economic Conditions
With the September quarter national accounts data scheduled for release the day after the Board meeting, information to hand at the meeting suggested that the pace of output growth was around trend over the year to the September quarter, despite some slowing in recent quarters, which in part reflected a decline in public investment.
Members noted that growth in business investment looked reasonably strong in the September quarter, though a range of data suggested that the outlook over the next few quarters was softer than had earlier been indicated. The outlook for mining investment over the remainder of the financial year had been revised down in the ABS capital expenditure survey, largely confirming the outlook based on liaison and other information that had been incorporated in the Bank's most recent forecasts.
Members observed that cost-cutting in the iron ore and coal industries was feeding through to related business services industries, resulting in some labour shedding. Even so, exports of iron ore had remained at a high level over recent months and coal exports from Queensland had been recovering following earlier industrial disruptions.
Investment outside the mining sector increased in the September quarter, although the capital expenditure survey suggested that there would be negligible growth, or even a small fall, in 2012/13 as a whole. Members noted that survey measures of business conditions had generally declined further and measures of capacity utilisation were a bit below average, with the Bank's liaison suggesting that some firms were investing only to cover the depreciation of existing capital. Members noted that there was also concern in the non-residential construction industry about the modest pipeline of work once the existing wave of committed resource projects was completed. While growth in credit to unincorporated businesses continued at a measured pace in recent months, growth of business credit overall had slowed.
Forward-looking indicators of residential construction over recent months, including building approvals, continued to point to a modest recovery in that sector over the period ahead. This was likely to be supported by the pick-up in dwelling prices, sales activity and rental yields over recent months. In addition, loan approvals had moved a little higher since the middle of the year.
Several indicators suggested that consumption growth had slowed in the September quarter, following the impetus to sales from heavy discounting and government payments in the first half of the year. After declining in July, the value of retail sales rose in August and September, but was unchanged in October. Measures of consumer sentiment had picked up a little in recent months to be a bit above average.
Employment in October continued to expand at a modest pace and the unemployment rate remained at 5.4 per cent, slightly above its level earlier in the year. Leading indicators and information from the Bank's liaison contacts suggested that labour demand had softened, which pointed to only modest employment growth in coming months.
As expected, the pace of wage growth eased in the September quarter. The slowing had been most pronounced in the household services and retail sectors. Business surveys and information from liaison suggested that businesses across of a range of industries anticipated an easing in wage pressures in the period ahead.
Members began their discussion on financial markets with the observation that most markets had been relatively steady over the past month, despite uncertainty about fiscal negotiations in the United States and the Greek bailout package. The agreement on Greece's financial aid package reached late in November provided only a small boost to markets, as most participants expected that further concessions would be needed. Despite the fact that Spain was yet to request financial assistance, yields on Spanish and other peripheral euro area sovereign debt had remained close to the levels reached after the European Central Bank's Outright Monetary Transactions program was announced in September.
Members observed that the primary markets for corporate debt globally were strong, with issuers benefiting from record low yields in many markets. Financial institutions generally had been less active issuers of debt securities in recent months. In Australia, issuance of bonds by corporates had reached a new high during 2012, as bond yields domestically also declined to record low levels. For the Australian banks, the focus remained on raising deposits, although there were signs that competition in some deposit markets was beginning to ease.
Share markets were broadly unchanged over November, with China being a notable exception, where share prices continued to decline despite improved economic indicators.
Members noted that global currency markets had also been relatively quiet in November, with exchange rate volatility low, although the Japanese yen had depreciated by around 3 per cent against the US dollar. The Australian dollar was little changed, remaining at a high level.
Members noted that domestic money markets had nearly fully priced in a cut in the cash rate target at the present meeting.
Considerations for Monetary Policy
Globally, economic news over the past month had a slightly more positive tone than was the case a few months earlier. Importantly, there were further signs that the pace of growth had stabilised in China, contributing to a general stabilisation in key commodity prices. The US economy had continued to grow at a moderate pace, although the uncertainties posed by the ‘fiscal cliff’ remained unresolved.
The available indicators suggested that the Australian economy had expanded at around trend over the year to the September quarter. Mining investment had made a further contribution to growth in the September quarter (although the outlook had softened a little further). There were also tentative signs that dwelling investment was turning up, but the outlook for non-mining investment overall in the year ahead remained subdued.
For inflation to remain contained, ongoing productivity growth and a further sustained moderation in wage growth would be needed. Recent data indicated that, to date, there had been a small decline in the growth of wages, which was consistent with the softening in the labour market seen over the past year. The forward-looking labour market indicators had generally declined recently, suggesting that employment growth would remain modest in the months ahead.
Following earlier decisions, lending rates were now clearly below their medium-term averages, although they remained above the levels reached in 2009. Some of the expected effects were starting to be observed and further effects could be anticipated over time. At the Board's previous meeting, members had considered that further easing may be appropriate in the period ahead, but had decided to maintain the existing setting for the time being, in view of the slightly higher-than-expected September quarter CPI and somewhat better information about the world economy.
At this meeting, the information on labour costs and softening labour market conditions suggested that the inflation outlook still afforded the Board some scope to provide additional support to demand. Further confirmation that the peak in resource sector investment was near, and that the short-term outlook for non-resource investment remained subdued, indicated that there was a case for the Board to provide that support. The Board considered whether to respond to this case in the near term or wait for further information. On balance, members saw merit in reducing the cash rate at this meeting.
The Board decided to lower the cash rate by 25 basis points to 3.00 per cent, effective 5 December.