The Reserve Bank of Australia (RBA) released the minutes of its October meeting today, expanding upon the views it expressed in its post-meeting monetary policy statement.
While largely reflecting the cautious optimism seen in the statement, there were a few talking points to come from today’s release, including the continued push-back from the board that monetary policy tightening from other major central banks does not automatically imply that it is about to follow suit.
Here’s what the minutes said on that subject.
A number of major central banks had either started to reduce the degree of monetary stimulus or were considering doing so. Nevertheless, financial market pricing suggested that policy rates were expected to remain low for some time. Members observed that moves towards higher interest rates in other economies were a welcome development, but did not have mechanical implications for the setting of policy in Australia, where the timing of any changes in interest rates would be dependent, as always, on developments in domestic economic conditions. Members also noted that monetary conditions in other advanced economies had been eased significantly more than in Australia since the onset of the financial crisis.
Put bluntly, the RBA is not in any rush to lift interest rates like other major central banks such as the US Federal Reserve and Bank of Canada, pointing out that these central banks eased policy significantly further than the RBA in the post GFC aftermath.
As it says, domestic economic conditions will determine when it decides to lift interest rates.
And, given its commentary on Australia’s inflation outlook, it seems that could still be someway off at this point.
Recent data had pointed to subdued price pressures across the economy in the June quarter. Retail electricity prices were expected to increase significantly in the September quarter and liaison with businesses had suggested that a number of firms, particularly in the retail and manufacturing sectors, were largely absorbing increases in energy costs into margins rather than passing them through to final prices.
So, based on early indications, there’s little evidence of second-round effects of higher energy costs being passed on to consumers.
And, placing further downside pressure on prices, it continued to warn about further strength in the Australia dollar.
The appreciation of the Australian dollar since mid 2017, partly reflecting a lower US dollar, was expected to contribute to ongoing subdued price pressures. A material further appreciation of the exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.
As an inflation-targeting central bank, this suggests that the bank is far from convinced of the need for higher interest rates at this juncture.
Further reinforcing this point, it also noted that the previously hot housing markets of Sydney and Melbourne continued to show signs of cooling.
Established housing market conditions had continued to ease in Sydney and Melbourne, but had been broadly unchanged in other cities. This pattern was evident in revised housing price data released by CoreLogic in September, as well as in auction clearance rates. Housing prices had continued to decline gradually in Perth. Nationwide measures of housing prices had increased by around 9 per cent over the year to September.
The trends in auction clearance rates and house prices have continued in recent weeks, partially as a result of further macroprudential measures introduced by Australia’s banking regulator, APRA, in late March, designed to curb previously strong levels of interest-only lending.
However, while a strong pipeline of new dwellings and tougher lending restrictions appear to be softening demand, the minutes noted that strong levels of population increase were helping to absorb supply in Melbourne.
While these factors suggest that the bank is someway off lifting interest rates, the minutes continued to express confidence about domestic labour market conditions, both now and in the future.
Both full-time and part-time employment had recorded solid growth in August. Members noted that this growth had been well above that required to absorb increases in the labour force owing to population growth. Since early 2017, employment growth had been above trend, the unemployment rate and other measures of labour underutilisation had declined a little and labour force participation had increased, particularly for older workers and prime-aged females. By industry, employment growth over the preceding year had been strongest in the household services sector, particularly health care and education, and had picked up notably in the construction sector. Forward-looking indicators of labour demand, including data on job advertisements, vacancies and hiring intentions, continued to point to slightly above-average growth in employment over the remainder of 2017.
And, with labour market conditions likely to remain firm, it expressed confidence about the outlook for wage growth and household consumption.
The current and prospective strength in employment growth in Australia was expected to support household spending in the period ahead, although slow growth in real wages and high levels of household debt were likely to be constraining influences. Remaining spare capacity meant that wage and price increases had been subdued. Wage growth was expected to increase gradually as spare capacity in the labour market diminished, which was in turn expected to contribute to a gradual rise in inflation over time.
However, while that, along with firm non-mining investment, government demand and commodity exports, are expected to help lift economic growth and inflationary pressures in the years ahead, paving the way for a potential increase in the cash rate, the minutes again expressed caution on state of household finances.
Our emphasis in bold.
Domestically, household balance sheets remained a key area of attention for policymakers. Household indebtedness remained high and had edged higher in an environment of low interest rates and weak income growth. Despite this, members noted that, relative to income, households’ borrowing from banks, net of offset balances, was only slightly higher than it had been a decade earlier. Interest payments relative to income had declined over the previous decade owing to the reduction in interest rates. However, the high level of debt also meant that households were sensitive to any increases in borrowing interest rates.
The last line is particularly telling, cautioning that any increase in borrowing costs could nip any recovery in household consumption in the bud should it be delivered too prematurely.
The final paragraph of the minutes again delivered a neutral bias on the outlook for interest rates, noting that “taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.”
While the board retains an optimistic outlook for both the Australian and global economy, its caution towards weak inflationary pressures and the vulnerability of household balance sheets continue to suggest that it will want to see domestic economic conditions strengthen further before it considers lifting rates.
That appears unlikely to happen in the near-term, especially with housing market conditions cooling at present.
The minutes can be accessed here.