As widely expected by financial markets and economists alike, the RBA left the official cash rate unchanged at 2.0% following its December monetary policy meeting.
Having first reintroduced it in November, the board maintained its easing bias in the final paragraph of the statement, noting “the outlook for inflation may afford scope for further easing of policy, should that be appropriate to lend support to demand.”
In what is a slightly surprising outcome, particularly given the recent sharp decline in the iron ore price, the board left its language towards the Australian dollar unchanged, suggesting that it “is adjusting to the significant declines in key commodity prices.”
On commodities, the board stated that “prices are much lower than a year ago, reflecting increased supply, including from Australia, as well as weaker demand.” This was almost identical to the language used by the board in November.
Looking at domestic economic growth, the board stated that “available information suggests that moderate expansion in the economy continues in the face of a large decline in capital spending in the mining sector,” something that in part reflects the weak September quarter business capital expenditure report released last week.
Elsewhere the tone of the statement was largely optimistic, reflective of strengthening conditions in non-mining sectors of the economy.
“Business surveys suggest a gradual improvement in conditions in non-mining sectors over the past year.” they noted, adding “credit provided by intermediaries to businesses picking up.”
Following October’s bumper jobs report – something that revealed employment increased by nearly 60,000 leaving the unemployment rate sharply lower at 5.9 – they noted that employment growth was “stronger” with a “steady rate of unemployment”.
Fitting with recent data towards the domestic housing market, they acknowledged that “the pace of growth in dwelling prices has moderated in Melbourne and Sydney over recent months and has remained mostly subdued in other cities,” largely unchanged from November.
Helping to explain the reasoning behind the moderation in house prices, they suggested “growth in lending to investors has eased.”
While there were small tweaks made, there was very little new information to come from the December policy statement. The RBA, as they have been for some time, are in wait-and-watch mode when it comes to the interest rate outlook.
Incoming economic data, along with the US Federal Reserve’s interest rate decision later this month, will likely determine whether or not interest rates will be reduced further in the new year.
Here’s the full December policy statement released by governor Glenn Stevens.
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 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, reflecting increased supply, including from Australia, as well as weaker demand. 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 in the face of a large decline in capital spending in the mining sector. While GDP growth has been somewhat below longer-term averages for some time, business surveys suggest a gradual improvement in conditions in non-mining sectors over the past year. This has been accompanied by 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.
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 credit provided by intermediaries to businesses picking up. Growth in lending to investors in the housing market has eased. Supervisory measures are helping to contain risks that may arise from the housing market.
The pace of growth in dwelling prices has moderated in Melbourne and Sydney over recent months and has remained mostly subdued in other cities. 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 again 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. 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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