Minutes of the Monetary Policy Meeting of the Reserve Bank Board
Sydney – 3 December 2013
Glenn Stevens (Chairman and Governor), Philip Lowe (Deputy Governor), John Akehurst, Roger Corbett AO, John Edwards, Kathryn Fagg, Martin Parkinson PSM (Secretary to the Treasury), Heather Ridout AO, 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
The data released over the past month suggested that growth of Australia's major trading partners continued around its long-term average, while inflation remained low globally, particularly in the large advanced economies. In China, growth looked to have been a bit stronger in the second half of the year than in the first half and, for 2013, was likely to be around, or even a little above, the government's 7. 5 per cent target. House prices and transaction volumes had increased further in recent months and most indicators of activity had remained strong. The net flow of financing declined in October from its high levels in the previous two months. While these data tend to be quite volatile, the lower flow was consistent with efforts to place financing on a more sustainable footing. The Chinese leadership had recently outlined its reform priorities for coming years, with various initiatives to deregulate prices, pursue land reform and liberalise the financial sector, among others.
In Japan, growth in economic activity in the September quarter was slower than in the first half of the year, but it was still a bit stronger than had been expected. Consumer prices were no longer declining and core inflation was positive. Economic activity in much of the rest of east Asia had continued to expand at around its decade-average pace.
The latest indicators for the US economy were consistent with some improvement in output growth through the year, driven primarily by private domestic demand. Labour market conditions had also improved somewhat. Recent data for the housing market had been mixed, but were consistent with further growth in dwelling investment. Economic conditions in the euro area appeared to have improved to some extent, with signs of stabilisation in some of the crisis economies and activity for the region as a whole increasing marginally in the September quarter.
Global commodity prices overall had not changed much since the previous Board meeting. Spot prices for both iron ore and thermal coal were little changed following earlier increases, while coking coal and base metals prices had drifted lower and oil prices were higher.
Domestic Economic Conditions
Labour market conditions had remained soft, with the level of employment flat since around the start of the year. While the unemployment rate had been little changed since the middle of the year, the participation rate had declined noticeably over the same period. Members noted that the ageing of the population and soft labour market conditions, which reduced the incentives to search for a job, had both contributed to the decline in the participation rate over the past two years or so. With employment growth well below population growth, the ratio of employment to the working-age population had fallen. In contrast, aggregate hours worked had continued to rise at close to trend pace, suggesting ongoing growth in labour demand. There had also been some tentative signs of a stabilisation in forward-looking indicators of labour demand – including reports from liaison of a slight improvement in employment intentions – although these remained at low levels.
The wage price index rose by 0.5 per cent in the September quarter, a little less than had been expected. The increase in wages of 2.7 per cent over the year was lower than the average growth rate over the past decade. Members observed that, with prices of tradable items no longer declining, the decline in wage growth over the past year would help keep inflation consistent with the medium-term target. Business surveys and liaison suggested that wage pressures were likely to remain modest in the period ahead.
Members were informed that the national accounts, scheduled for release the day after the Board meeting, were expected to show that output growth remained a bit below trend.
Business investment appeared to have risen in the September quarter after declining in the previous two quarters. Looking ahead, business investment intentions reported in the latest ABS capital expenditure survey were similar to those from the reading three months earlier, and were consistent with little change in 2013/14 in that part of non-mining investment covered by the survey. However, non-mining investment not covered by the survey was expected to show some growth over 2013/14, most notably in the health industry. The survey still pointed to an increase in the level of mining investment in 2013/14, although members noted that the capital expenditure survey tends to be a less accurate guide to future mining investment than it is for the non-mining components surveyed. In contrast to the capital expenditure survey, public statements by mining companies and information from the Bank's liaison suggested that mining investment would be likely to decline over the period ahead.
Survey measures of business conditions improved a little further in October. Business confidence was also higher than it had been earlier in the year, although it fell to around long-run average levels in October following a sharp rise in September.
The recent trade data showed further growth of resources exports, notably for iron ore, while services exports had increased, consistent with evidence from liaison of some improvement in prospects for tourism and education exports.
Household consumption growth looked to have remained a bit below average in the September quarter, but conditions appeared to have picked up a little since then. Retail sales growth was higher in the three months to October than around the middle of the year. While information from liaison suggested that this strength may not have been carried through to November, some retailers appeared to be more optimistic ahead of the Christmas trading period. Motor vehicle sales to households had fallen in September and October but they were at a high level overall, and consumer sentiment remained above average.
Forward-looking indicators suggested that dwelling investment would pick up in the period ahead, even though data on work done pointed to a modest decline in measured new dwelling investment in the September quarter. Dwelling approvals had increased in all states over recent months and first home owner grants for new dwellings had been rising, following the redirection of state government incentives for first home buyers towards new construction. Conditions in the established housing market had strengthened further. Housing prices had increased at an annualised rate of 15 per cent over the past six months, with the largest increases in Sydney, but prices in other cities had also picked up over recent months and auction clearance rates remained well above average. Loan approvals increased significantly in September and October, to be about 20 per cent higher over the year. In line with this, housing credit growth had been edging higher, especially for investors.
Board members began their discussion of financial markets with a brief review of the changes to the Reserve Bank's balance sheet resulting from the implementation of new liquidity arrangements provided to exchange settlement (ES) account holders involved in the settlement of direct entry payments. Since these payments could now be settled for same-day value – including during periods when the interbank cash market was closed – ES account holders now held sufficient buffers of liquidity to enable them to meet these late-day payments. ES account holders had established open-ended repurchase agreements with the Bank worth an aggregate $21 billion, mainly through the sale of self-securitised assets. This change had increased both sides of the Bank's balance sheet by that amount: the Bank's liabilities rose because banks now held higher ES balances, while assets increased since these balances had been funded by banks borrowing from the Bank under repurchase agreements.
Turning to central bank policy settings, members discussed the European Central Bank's 25 basis point cut in its main refinancing rate to 0.25 per cent at its meeting in early November, in response to inflation remaining below target. They noted that stronger economic data for the United States had again focused attention on when the Federal Reserve would start to unwind its highly expansionary policy settings. The consensus view within financial markets remained for a ‘tapering’ of the Fed's asset purchases to commence in March. The Fed had continued to emphasise that this move need not presage a near-term increase in the policy rate and, reflecting this, US money market prices currently implied no increase in the policy rate until late in 2015.
The stronger economic data in the United States had also contributed to higher long-term bond rates in most markets. Yields on 10-year US government bonds rose by around 25 basis points over the month. Members noted that sovereign bond yields in emerging markets generally rose during November, with economies that had previously been sensitive to concerns about a change in Fed policy – including Brazil, Indonesia, South Africa and Turkey – the most affected.
In the domestic market, the yield curve for Commonwealth Government Securities (CGS) was extended by the inaugural issue of a 20-year nominal bond, which had been well subscribed. Official data showed that non-resident investors purchased around 60 per cent of the issue, with foreign central banks accounting for nearly half of the offshore demand.
Members observed that bond issuance by Australian banks had picked up in November with a total of $17 billion raised. Most of the issuance was in offshore markets and it was mainly in unsecured form. Over the month, spreads on major banks' senior unsecured and covered bonds were little changed and, relative to CGS yields, had remained at around their lowest level since the onset of the global financial crisis. In aggregate, the four major banks recorded solid profit results in the half year to September.
Share markets mostly increased in the major economies over November, with the US S&P 500 reaching a new all-time high and the Nikkei rising to its highest level since December 2007. In contrast, the Australian share market was little changed. Its underperformance relative to most other developed markets was a reflection of both the weaker performance and larger size of the resources sector in Australia. Equity prices in many of the emerging markets had also been somewhat weaker over the past month.
Members noted that the generally stronger US data recently had also contributed to an appreciation of the US dollar against most currencies during November, with the pound sterling a notable exception. There was a small depreciation of the euro, although it remained at a relatively high level, while the Japanese yen had depreciated further notwithstanding stronger economic data in Japan, as the Bank of Japan continued to expand the money base rapidly. The Australian dollar had also depreciated noticeably over the past month; on a trade-weighted basis, the exchange rate was about 13 per cent below its peak in April, although still slightly above the lows reached in August.
Money market pricing in Australia at the time of the meeting indicated that no change was expected in the cash rate in either direction in the near term.
Considerations for Monetary Policy
Members noted that Australia's major trading partners as a group appeared to have been growing at close to the long-run average rate over the second half of this year. Recent data suggested that growth of the Australian economy had remained a bit below trend over the second half of the year. Business investment had risen in the September quarter, but mining investment was likely to decline over the next few years and while other areas of business investment could be expected to increase from current very weak levels, that would take time. Resources exports were rising as the production phase of the resources boom gathered pace. While dwelling investment had reportedly declined in the September quarter, a range of indicators pointed to growth in the period ahead. Consumption spending was growing at a moderate pace. Overall, growth of the economy was expected to continue at a below-trend pace over the next year, picking up thereafter.
At recent meetings, the Board had judged that leaving the cash rate unchanged was appropriate while continuing to gauge the effects of the substantial degree of monetary policy stimulus that had already been put in place. There had been further signs of the stimulatory effects of low interest rates, most notably in the housing market, and additional effects were still likely to be coming through. At the same time, inflation remained within the target. While the exchange rate had depreciated over the month, members agreed that it remained uncomfortably high and a lower level would likely be needed to achieve balanced growth in the economy.
The Board's judgement remained that, given the substantial degree of policy stimulus that had been imparted, it was prudent to hold the cash rate steady while continuing to gauge the effects of earlier reductions, but not to close off the possibility of reducing it further should that be appropriate to support sustainable growth in economic activity, consistent with the inflation target. The Board would continue to examine the data over the months ahead to assess whether monetary policy remained appropriate.
The Board decided to leave the cash rate unchanged at 2.5 per cent.