RBA Minutes From December Signals Little

The latest minutes suggest no early change to the cash rate is likely, given on one hand spare capacity in the economy, slowing investment housing lending, some slippage in house prices, and yet also some momentum in the non-mining business sector.

The available data suggested that dwelling investment had increased in the September quarter. Building approvals remained at high levels, despite having eased somewhat since the start of the year. This was consistent with the expectation of further increases in dwelling investment in coming quarters, albeit at a gradually declining rate.

In the established housing market, auction clearance rates and housing price growth had declined over recent months in Sydney and to a lesser extent in Melbourne. Prices were declining in Perth and rising moderately in much of the rest of the country. Members observed that the growth of total housing credit had been little changed. The easing in housing price growth in Sydney and Melbourne and apparently lower growth in lending for the purpose of investor housing had followed an earlier tightening in lending terms, partly in response to supervisory measures announced by the Australian Prudential Regulation Authority. It was still too early to assess the effect of the modest increase in lenders’ mortgage rates in November (for both investors and owner-occupiers) on the housing market.

Mining investment was estimated to have fallen in the September quarter and further declines were expected in the period ahead, with the largest subtraction from growth expected to occur in the current financial year. Non-mining investment was estimated to have been little changed over the year to the September quarter. Investment intentions reported in the ABS capital expenditure survey – which covers only around half of non-mining investment – continued to point to a decline in non-mining investment in 2015/16, and non-residential building approvals had remained at relatively low levels. In contrast, survey measures of business conditions continued to improve and were clearly above average, in particular for the household services and business services sectors, whose output was generally less capital intensive than other sectors. Business credit had increased further in October.

In considering the stance of monetary policy, members noted that the available data suggested that the global economy continued to record moderate growth. Continued softness in demand growth in Asia had been associated with a further fall in commodity prices. At the same time, there had been further growth in the United States and a continued recovery in Europe. Monetary policy was accommodative in most economies, which, combined with the low level of oil prices, was expected to support growth in Australia’s major trading partners over the next couple of years. Core inflation rates remained stable, but generally below central banks’ targets.

Members noted that recent domestic data had generally been positive. There continued to be evidence that very low interest rates were supporting growth in household consumption and dwelling investment, and the exchange rate was adjusting to the significant declines in key commodity prices and boosting demand for domestic production. This had translated into stronger employment growth and was consistent with surveys suggesting that business conditions were above average. Resource exports had continued to make a significant contribution to growth.

Overall, the forecasts for the Australian economy were for output growth to strengthen gradually over the next two years as the drag on GDP growth from falling mining investment gradually diminished and activity progressively shifted to non-mining sectors of the economy. Business surveys suggested that there had been an improvement in conditions in non-mining sectors over the past year, which had been accompanied by stronger growth in employment and a steady rate of unemployment. Even so, members recognised that there was still evidence of spare capacity in the economy, including in the labour market. Wage growth remained low and underlying inflation was expected to be consistent with the target over the next one to two years.

Credit growth had increased a little over recent months, as a result of business credit growth increasing. Growth in lending to investors in the housing market appeared to have eased, with a moderation in the pace of growth in housing prices in Sydney and Melbourne over recent months. Housing price growth had mostly remained subdued in other cities. While the recent changes to some lending rates for housing would reduce demand slightly, overall conditions remained quite accommodative. Members observed that supervisory measures had been helping to contain risks that may arise from the housing market.

Based on the available data and the forecasts, the Board decided that leaving the cash rate unchanged at this meeting was appropriate. Members judged that the outlook for inflation may afford some scope for a further easing of monetary policy should that be appropriate to lend support to demand. The Board would continue to assess the outlook, and hence whether the current stance of policy would most effectively foster sustainable growth and inflation consistent with the target.

Author: Martin North

Martin North is the Principal of Digital Finance Analytics

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