Minutes of the Monetary Policy Meeting of the Reserve Bank Board
Sydney – 4 June 2013
Glenn Stevens (Chairman and Governor), Philip Lowe (Deputy Governor), Martin Parkinson PSM (Secretary to the Treasury), John Akehurst, Roger Corbett AO, John Edwards, Kathryn Fagg, 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 began their discussion by noting that the global economic data released over the past month or so had been broadly consistent with growth of Australia's major trading partners being close to average this year, and picking up gradually next year. In addition, there had been a decline in inflation across much of the globe in recent months.
In China, economic activity appeared to be expanding at a steady pace, driven by strong investment growth, with both infrastructure and real estate investment continuing to grow strongly. Conditions in the residential property market remained buoyant in April, although members observed that recently announced controls could weigh on activity in coming months, depending on how widely and strictly they were enforced.
Available indicators suggested that the US economy was continuing on a path of moderate growth. Household consumption was being supported by improving conditions in the housing and labour markets. However, recent indicators suggested that conditions in the manufacturing sector had been somewhat subdued in April and May.
Members noted that the euro area remained in recession, with output falling in most countries in the March quarter. More timely data indicated that economic conditions remained weak.
Growth in the Japanese economy picked up in the March quarter and indicators of activity pointed to continued growth in April. This was consistent with the increased optimism following the announcement of additional fiscal and monetary policy measures since late last year. In the rest of east Asia, growth of domestic final demand had been reasonably stable in recent quarters. Some indicators, such as capital imports, had recently picked up.
Over the past month, the spot price for iron ore had fallen further, unwinding the sharp increase around the turn of the year, and the spot price for coking coal had also declined. In contrast, prices for thermal coal, base metals and rural commodities had showed little change.
Domestic Economic Conditions
The limited data for the Australian economy released over the previous month had been mixed, with indicators for the household sector generally remaining stronger than those for the business sector. With the March quarter national accounts scheduled for release the day after the Board meeting, members were briefed on the indicators that were available at the time of the meeting. These suggested that economic activity had grown at close to, or a little below, trend pace in the March quarter, consistent with growth over the year being a bit below trend. However, members noted that this estimate remained subject to the usual degree of uncertainty.
Exports had grown further in the March quarter. Resources exports, particularly of bulk commodities, had grown strongly over the past year, while services exports had resumed growth more recently.
Available information indicated that business investment had declined in the March quarter. According to the latest ABS capital expenditure survey, the decline had been in both the mining and non-mining sectors. The fall in capital imports since the beginning of the year was consistent with a decline in investment in the first quarter, although recent data showed that capital imports had bounced back somewhat in April.
According to the ABS survey of firms' capital expenditure plans, non-mining investment was expected to show moderate growth over the next year or so. While the survey also continued to imply further growth in mining investment, in the past actual annual capital expenditure by mining companies had often differed by a wide margin from their forecasts as reflected in the ABS survey. Based on public statements by mining companies and information from the Bank's liaison, it seemed likely that mining investment was near its peak but would probably remain at a high level for the next year or so. However, members observed that there was considerable uncertainty about mining investment beyond that period. In particular, changes in production and exports of energy commodities in other countries were making it more difficult to assess the potential for new projects in the gas sector in Australia. Overall, conditions in the business sector remained somewhat subdued, with survey measures for all industries at, or below, average levels.
Household spending appeared to have picked up early in 2013, after having slowed late in 2012 and having been supported by higher asset prices. In the March quarter, growth of retail sales volumes was strong across most categories, amid a decline in retail prices. Liaison suggested that the pace of retail spending might have eased somewhat more recently, while measures of consumer confidence fell back to around average levels in May.
Members observed that the effects of low interest rates had been evident in a range of housing market indicators. Building approvals for both higher-density and detached dwellings had increased over recent months. The Bank's liaison contacts were generally becoming more positive about the outlook for dwelling investment. Also, loan approvals had grown more strongly in recent months, including for new housing, and auction clearance rates were well above average in Sydney and had picked up to be a bit above average in Melbourne. While measures of dwelling prices had been relatively flat over recent months, they were still higher than the previous year.
Labour market conditions remained somewhat subdued. The monthly employment data continued to be volatile, with a large increase in employment in April following a sizeable decrease in March. Looking through this volatility, employment growth had not been as fast as growth of the labour force, which had led to the unemployment rate drifting higher over the past year, to 5½ per cent. Job advertisements had stabilised earlier in the year, but had edged down in recent months. Overall, leading indicators of employment pointed to continued moderate employment growth.
The wage price index had increased by 0.7 per cent in the March quarter, a little less than had been expected, and year-ended wage growth was below the average of the past decade. The easing in wage growth had been broad based across industries and states, with notable declines in areas related to the mining sector. While the decline in the pace of wage growth in recent quarters had been most pronounced in the private sector, growth in public sector wages continued to slow in the March quarter and remained relatively subdued, consistent with ongoing fiscal restraint.
The Australian Government's budget was tabled in May. Members noted that the profile for the fiscal impact over coming years was broadly in line with the assumptions underpinning the forecasts for growth published in the May Statement on Monetary Policy.
Developments in international financial markets over the past month were largely driven by uncertainty about the likely effects over time of the Bank of Japan's recent policy announcement and whether the US Federal Reserve was approaching a turning point in its monetary policy cycle.
In Japan, financial market participants had been weighing up two competing forces: the direct, downward pressure on yields from bond purchases by the Bank of Japan versus the upward pressure from expectations that these purchases would succeed in reflating the economy. The net result had been a marked increase in volatility and higher bond yields in Japan. Members noted that, while Japanese investors had shifted out of bonds and into equities, there had been little evidence to date of a shift into foreign bonds. Nonetheless, if it occurred, such a shift had the potential to affect Australian foreign exchange and debt markets. Despite Japanese investors allocating a relatively small share of their holdings of foreign debt securities to Australia, the absolute value of this allocation was large relative to the size of both Australian debt markets and capital inflows.
In the United States, 10-year Treasury yields had risen by around 50 basis points during May, mainly reflecting the uncertainty about a possible turning point in the US monetary policy cycle. In this context, members discussed the possibility of further substantial increases in yields on US Treasuries, and noted the increase that had occurred in 1994, which was associated with the Federal Reserve's tightening of monetary policy during that period.
Members noted that a number of other central banks had reduced their policy rates during May, including the European Central Bank, which had lowered its policy rate to 50 basis points. Members also observed that spreads in peripheral European markets had fallen to their lowest level in two to three years, and Portugal had been able to issue its first new bond since early 2011. Yields on sub-investment grade corporate bonds had fallen further, with yields for most classes of corporate bonds reaching record lows.
In Australia, yields on Commonwealth Government securities had risen, but by less than yields on US Treasuries. Spreads and yields on Australian corporate bonds were broadly unchanged over the month and, in common with those in other countries, remained at low levels.
Members noted that most equity markets had continued to rise over the past month. Despite a sharp fall in late May and early June, the Japanese market remained around 50 per cent higher than in November 2012 at the time the Japanese elections were announced. Equity markets elsewhere had generally showed small gains over the past month. However, the Australian equity market had declined, with share prices for some companies falling in response to profit warnings. Share prices of Australian banks had retraced the significant increases recorded earlier in the month, which had followed their positive earnings reports.
In foreign exchange markets, the US dollar had appreciated further against most currencies over the past month, with the Chinese renminbi a notable exception. The appreciation of the US dollar had mostly reflected changing expectations about US monetary policy. In that regard, an important contributor to the recent depreciation of the Australian dollar had been the US dollar's appreciation. Members noted, however, that the Australian dollar had depreciated against most currencies, reflecting further declines in commodity prices and market concerns about the outlook for China, as well as the reduction in the cash rate in May. Over the past month, the exchange rate had depreciated by around 5 per cent in trade-weighted terms and it was around 8 per cent below the historical high reached in early April.
Following the Board's decision in May to reduce the cash rate target by 25 basis points, most lenders in Australia had subsequently lowered their standard variable housing rates in line with the reduction in the cash rate. This resulted in lending rates for most households and businesses reaching or approaching historic lows.
Members noted that current market pricing in Australia indicated little expectation of a change in the cash rate at the June meeting.
Considerations for Monetary Policy
Data on global economic activity released over the past month had been broadly consistent with earlier forecasts of around average growth in Australia's major trading partners this year, with growth picking up gradually thereafter. Prices of some bulk commodities had declined further in the past month and global inflation had eased somewhat. Financial conditions internationally remained very accommodative.
For the domestic economy, the best estimate was that growth had been a bit below trend over the past four quarters. Most recent data were consistent with earlier forecasts of this continuing in the near term. Mining investment appeared to be close to its peak and was expected to remain at a high level for the next year or so, although the exact profile was difficult to predict. Exports of bulk commodities had been growing strongly, and this was expected to continue for some time given the large amount of investment recently completed and currently underway.
Conditions in the non-mining business sector remained subdued. Survey measures of conditions and investment intentions, together with only modest growth in business debt, suggested that non-mining business investment would remain subdued in the near term. Nonetheless, the latest ABS survey of firms' investment intentions for 2013/14 indicated that modest growth in non-mining business investment was likely over the course of the year ahead.
There were also signs that the appetite for borrowing in the household sector was picking up, and the housing market generally appeared to be improving, as the effects of the most recent and earlier reductions in the cash rate worked their way through the economy.
Forward-looking indicators of labour demand were consistent with further moderate growth in employment. Wages growth had slowed over recent quarters, which would help to contain inflation as the exchange rate depreciated.
Interest rates had declined further as a result of the Board's decision at the May meeting. The exchange rate had also depreciated noticeably, though it remained at a high level considering the decline in export prices that had taken place over the past year and a half. It was possible that the exchange rate would depreciate further over time as the terms of trade declined, which would help to foster a rebalancing of growth in the economy.
At this meeting, members viewed the current stance of monetary policy as appropriate for the time being. The Board also judged that the inflation outlook as currently assessed might provide some scope for further easing, should that be required to support demand.
The Board decided to leave the cash rate unchanged at 2.75 per cent.