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RBA LEAVES RATES ON HOLD

Jockeys wait prior to the start of Melbourne Cup Day 2014. Photo: Mark Metcalfe/ Getty.

As predicted by a slim majority of economists and those in financial markets, the Reserve Bank of Australia left the official cash rate on hold at a record-low level of 2.0% at its November policy meeting.

With rates left unchanged, attention quickly turned to the accompanying monetary policy statement, particularly the final paragraph in which the board outlines its forward guidance on the future direction of interest rates.

While rates were left unchanged, the final paragraph was anything but. Here it is:

“At today’s meeting the Board judged that the prospects for an improvement in economic conditions had firmed a little over recent months and that leaving the cash rate unchanged was appropriate at this meeting. Members also observed that the outlook for inflation may afford scope for further easing of policy, should that be appropriate to lend support to demand. The Board will continue to assess the outlook, and hence whether the current stance of policy will most effectively foster sustainable growth and inflation consistent with the target.”

Essentially the board acknowledged that the outlook for the economy has improved, while at the same time noting that the low inflation outlook allows them room to cut interest rates further should the need arise.

It’s an easing bias, make no mistake, but with a hawkish twist. They can cut rates, but only if the economic outlook dims significantly enough to warrant additional monetary policy stimulus.

Besides the change to the wording of the final paragraph, there were other significant tweaks throughout the policy statement.

One of the most notable came from the residential property market. The board noted that property prices in Sydney and Melbourne, though continuing to increase, had “moderated of late”. This is a significant change from October where they board noted that “prices continued to rise strongly”.

Clearly concerns about continued strong price growth, adding to financial stability concerns, have ebbed in over the past month in line with declining auction clearance rates.

Outside of housing, the tone towards recent developments in the domestic economy were cautiously optimistic.

“In Australia, the available information suggests that moderate expansion in the economy continues,” said the RBA.

They also acknowledged the recent improvement in business confidence, along with the domestic labour market.

“Business surveys suggest a gradual improvement in conditions over the past year. This has been accompanied by somewhat stronger growth in employment and a steady rate of unemployment.”

As they have stated for several months, they acknowledged that “the Australian dollar is adjusting to the significant declines in key commodity prices.”

On inflation, the board stated that it “is low and should remain so”, fitting with the recent September quarter inflation report that came in well below market expectation.

It is “forecast to be consistent with the target over the next one to two years, but a little lower than earlier expected.”

The tone of the statement, particularly towards the domestic economy, suggests that the board are not on the cusp of reducing interest rates in the months ahead as some notable forecasters currently predict. While they inserted an easing bias in the final paragraph of the statement, they countered that view by noting that the prospects for an improvement in economic conditions had firmed a little over recent months.

They are, as communicated in previous statements, in wait-and-watch mode at present. Without a further near-term deterioration in the economy, it appears unlikely that rates will lowered further. There is a monetary policy meeting in December, but it now appears unlikely that rates will be adjusted in the months ahead.

Here’s the full November monetary policy statement.

“At its meeting today, the Board decided to leave the cash rate unchanged at 2.0 per cent.

The global economy is expanding at a moderate pace, with some further softening in conditions in the Asian region, continuing US growth and a recovery in Europe. Key commodity prices are much lower than a year ago, in part reflecting increased supply, including from Australia. Australia’s terms of trade are falling.

The Federal Reserve is expected to start increasing its policy rate over the period ahead, but some other major central banks are continuing to ease monetary policy. Volatility in financial markets has abated somewhat for the moment. While credit costs for some emerging market countries remain higher than a year ago, global financial conditions overall remain very accommodative.

In Australia, the available information suggests that moderate expansion in the economy continues. While GDP growth has been somewhat below longer-term averages for some time, business surveys suggest a gradual improvement in conditions over the past year. This has been accompanied by somewhat stronger growth in employment and a steady rate of unemployment.

Inflation is low and should remain so, with the economy likely to have a degree of spare capacity for some time yet. Inflation is forecast to be consistent with the target over the next one to two years, but a little lower than earlier expected.

In such circumstances, monetary policy needs to be accommodative. Low interest rates are acting to support borrowing and spending. While the recent changes to some lending rates for housing will reduce this support slightly, overall conditions are still quite accommodative. Credit growth has increased a little over recent months, with growth in lending to investors in the housing market easing slightly while that for owner-occupiers appears to be picking up. Dwelling prices continue to rise in Melbourne and Sydney, though the pace of growth has moderated of late. Growth in dwelling prices has remained mostly subdued in other cities. Supervisory measures are helping to contain risks that may arise from the housing market.

In other asset markets, prices for commercial property have been supported by lower long-term interest rates, while equity prices have moved in parallel with developments in global markets. The Australian dollar is adjusting to the significant declines in key commodity prices.

At today’s meeting the Board judged that the prospects for an improvement in economic conditions had firmed a little over recent months and that leaving the cash rate unchanged was appropriate at this meeting. Members also observed that the outlook for inflation may afford scope for further easing of policy, should that be appropriate to lend support to demand. The Board will continue to assess the outlook, and hence whether the current stance of policy will most effectively foster sustainable growth and inflation consistent with the target.”

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