Minutes of the Monetary Policy Meeting of the Reserve Bank Board
Sydney – 2 April 2013
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
Members noted that economic conditions early this year were, on balance, consistent with global economic growth being around average. A range of monthly indicators suggested that China's economic growth had continued at a steady pace, with strong contributions continuing to come from infrastructure and real estate investment. Conditions in the housing market had picked up noticeably over recent months. The central authorities had announced further support for social housing construction as well as additional restrictions on property transactions.
Conditions had recently been more favourable in the rest of east Asia than had been the case for most of 2012. Across much of the region, export values increased in early 2013 while industrial production had been flat, although generally higher than several months earlier. In India, GDP had increased strongly in the December quarter, after two very weak quarters. In Japan, measures of business and consumer confidence had picked up, along with inflation expectations, following the earlier announcements of fiscal expansion and changes to the monetary policy framework.
Members observed that the US economy continued to grow at a moderate pace, with private sector demand strengthening further. Household spending had increased in recent months despite tax increases from 1 January, and housing sector indicators had shown further improvement. The pace of growth in non-farm payrolls had increased over recent months and the unemployment rate was lower than it had been in the middle of 2012. At the same time, however, budget spending cuts effective from 1 March were expected to weigh on growth this year.
Members noted the contrast with the euro area, where conditions remained poor. GDP declined in the December quarter and the unemployment rate had risen again in January, to almost 12 per cent. While some indicators had improved a little recently – including consumer confidence, retail sales and exports – activity overall was likely to remain subdued in early 2013. Negotiations over the support package for Cyprus had again highlighted the fragility of conditions in the euro area.
The spot price for iron ore had declined over the past month, consistent with earlier expectations of a correction from recent high levels. Other commodity prices had been little changed overall.
Domestic Economic Conditions
Members noted that the national accounts data, released the day after the March Board meeting, confirmed that growth of the economy was close to trend over 2012 as a whole, but with slower growth over the second half of the year. GDP expanded by 0.6 per cent in the December quarter, reflecting strong growth in resources exports, mining investment and dwelling investment, while household consumption recorded modest growth and public demand declined further. Overall growth over the year was 3.1 per cent, which, with total hours worked recording a small decline over the same period, implied strong growth in labour productivity.
The limited new data to hand for this meeting were broadly consistent with the earlier outlook for the economy. In particular, mining investment still appeared to be close to its peak (and hence its impetus to growth was likely to slow) but resources exports were projected to continue to grow strongly. A moderate rise in dwelling investment was expected and household consumption was forecast to grow broadly in line with household incomes, while growth in public demand was likely to be modest. Non-mining investment was likely to remain subdued in the near term but to pick up gradually in the second half of 2013.
Recent indicators suggested that growth of consumption had increased over recent months after a softer December quarter. The value of retail sales picked up strongly in January and the Bank's liaison pointed to further growth in February and March. Motor vehicle sales had remained high, though they had fallen a little from their recent peak. In addition, measures of consumer confidence had risen to be clearly above their long-run averages.
Members observed that conditions in the housing market had continued to improve. House prices increased again over March, to be 4¼ per cent above their mid-2012 trough, auction clearance rates had moved higher and there were signs of somewhat stronger growth in housing loan approvals. The Bank's liaison with home builders suggested that demand for new housing had been a little more positive of late, with a rise in activity reported in most capital cities.
Surveys of business conditions were somewhat mixed over the month, although conditions generally remained a little below long-run averages. Business conditions appeared to have improved for the construction industry overall but declined in the mining sector, notwithstanding the prospect of strong growth in resources exports. Information from the Bank's liaison indicated some willingness on the part of firms outside the mining sector to increase investment spending, especially on information technology assets and systems. Business debt was still growing, albeit at a somewhat slower pace over recent months; credit to smaller businesses was rising at a steady pace and large corporations were able to access non-intermediated funds.
Members discussed the various labour market indicators. There was a surprisingly large increase in employment in February, accompanied by a rise in the participation rate. However, a substantial part of the increase in employment appeared to reflect changes in the sample. The unemployment rate, which tends to be less volatile than employment growth, was unchanged at 5.4 per cent. While the most recent quarterly data showed a decline in vacancies, higher-frequency forward-looking indicators showed tentative signs of stabilising. Overall, these indicators were consistent with moderate growth in employment in the months ahead.
Members opened their discussion on financial markets with the observation that markets had remained generally calm over the past month, despite the uncertainty emanating from developments in Cyprus. In order to secure financial assistance of up to €10 billion from the European authorities and the IMF, the Cypriot Government had initially proposed a one-time levy on all bank deposits in Cyprus, including insured deposits, but this failed to pass the Cypriot Parliament. A second proposal had now been made, involving the winding up of Cyprus' second largest bank – with bond and equity holders basically losing everything and a significant ‘haircut’ imposed on large depositors – as well as the recapitalisation of the largest bank, which would see shareholders, bondholders and large depositors again sharing some of the financial burden.
To date, members noted that there had been little apparent spill-over from these events to other financial markets. Spanish and Italian government bond yields were little changed, notwithstanding the continued absence of a government in Italy as a result of the recent election. Expectations of further asset purchases by the Bank of Japan had contributed to a decline in government bond yields in Japan to near record lows, while those in major European markets also fell. US bond yields were little changed. Members noted, however, that the various resolution proposals in Cyprus may have increased the risk of future depositor withdrawals in other countries in times of increased uncertainty.
Funding conditions for non-financial corporates in the major markets had remained favourable. Issuance in the United States and the euro area had been strong, including by sub-investment grade companies, while issuance of residential mortgage-backed securities in Australia in the March quarter had been the strongest in nearly two years, with much of the issuance coming from the non-bank sector.
Members observed that little spill-over from the Cypriot crisis had been evident in most equity markets as well, with share prices in both the United States and euro area higher over the past month, while the Japanese market had risen by around 10 per cent (to be more than 50 per cent above its 2012 low point). In contrast, share prices in Australia had fallen over the past month – with the declines most pronounced in the major resources stocks – although this had followed a period of relative outperformance.
Most major currencies continued their recent trends. The Japanese yen depreciated further against the US dollar as the new Governor of the Bank of Japan stated that the central bank would do ‘whatever it can’ to achieve the new inflation target of 2 per cent. The euro had depreciated against the US dollar as a result of developments in Cyprus, while better-than-expected domestic economic data saw the Australian dollar reach its highest level on a trade-weighted basis since early 1985. Members again noted that the exchange rate remained high despite the terms of trade having declined significantly since peaking about 18 months earlier.
Members were updated on the funding composition of Australian banks, with deposits rising further as a share of total funding, despite being more expensive than comparable wholesale funding sources. Average interest rates on outstanding housing and business loans had been largely unchanged since the end of February. In the money market, current pricing implied a very small expectation of an easing in monetary policy at the current meeting, and less than one 25 basis point easing priced in by the end of the year. Members also discussed recent changes announced by the Australian Financial Market Association to the way in which the bank bill swap rate in Australia would be set in future.
Considerations for Monetary Policy
Global economic conditions were consistent with growth generally being close to average, but with Europe the main area of weakness. Indications were that the Chinese economy had continued to grow at a steady pace and signs of improved economic conditions across the rest of Asia had emerged over the past six months or so. In the United States, growth of private demand was acting to offset the headwinds associated with fiscal consolidation. While the risks to the global outlook appeared to be more balanced than they had been in the preceding year, recent events had highlighted the fact that important vulnerabilities remained, particularly in Europe. With activity across Europe as a whole expected to remain weak this year, there was some risk of further adverse feedback between fiscal restraint and economic activity. Despite recent turmoil in Cyprus, financial markets had remained generally calm.
Domestically, the national accounts showed that GDP growth was around trend over the year to the December quarter, but slower in the second half of the year. Over the past few months, housing loan approvals had picked up for both owner-occupiers and investors, and stronger conditions in the established housing market more generally were expected to support moderate growth of dwelling investment this year.
Business investment outside the resources sector remained subdued. While there remained uncertainty about its anticipated pick-up, the recent data were, on balance, consistent with this pick-up taking place. In general, access to funding did not appear to have been an impediment to investment. Firms in some industries had shown a willingness to add to their workforce – including in the construction industry – and recent labour market data had been mixed.
Members noted that the national accounts pointed to further growth in productivity over the year to the December quarter. The Bank's forecasts for inflation to remain close to the target over the next year or so assumed ongoing productivity growth and wage growth remaining around the more moderate pace of recent quarters.
Overall, recent data suggested that interest-sensitive parts of the economy were responding to the historically low levels of lending rates and it remained likely that this had further to run. At the same time, the factors weighing on the economy – including the high exchange rate, the waning growth of mining investment, and fiscal consolidation – were likely to persist. The key issues were what the balance of these factors would turn out to be. With growth forecast to be a little below trend in 2013, and inflation close to target, members judged that it was appropriate for the stance of policy to be accommodative. The outlook for inflation, as currently assessed, would provide scope for further easing should that be necessary to support demand. At this meeting, the Board's judgement remained that, on the information currently to hand, the most prudent course was to hold rates steady and to continue to assess developments over the period ahead.
The Board decided to leave the cash rate unchanged at 3.0 per cent.