RBA minutes: Rates on hold consistent with sustainable growth, awaiting Q3 CPI to update assessment

The minutes of the Oct RBA meeting when interest rates were held unchanged at 1.5% have been released.

As the RBA minutes notes: "Taking account of developments since the previous meeting, the Board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time."

"Members noted that data on CPI inflation for the September quarter and an update of the forecasts would be available at the next meeting. This would provide an opportunity to consider the economic outlook, assess the effects of previous reductions in the cash rate and review conditions in the labour and housing markets" RBA added.

Minutes of the Monetary Policy Meeting of the Reserve Bank Board – Considerations for Monetary Policy

Overall, developments in the global economy had been slightly more positive leading up to the meeting. Although the Chinese economy was still facing a difficult transition, growth in China appeared to have stabilised and demand for commodities had been resilient. At the same time, some reduction in the supply of commodities had contributed to an increase in commodity prices since the turn of the year. This had supported a rise in Australia's terms of trade around the middle of this year. Members observed that the forecast stabilisation in the terms of trade around current levels would see an end to the drag on incomes from the persistent decline in the terms of trade over recent years. Globally, inflation remained below most central bank targets and monetary policy settings were very stimulatory.

Over the past year, the Australian economy had continued its transition following the end of the mining investment boom. Over the year to the June quarter, GDP growth had been a little above estimates of potential, driven mainly by growth in resource exports that had been stronger than expected a year earlier. Growth in the June quarter had been more moderate than in the March quarter. Recent data were consistent with further moderate growth in the September quarter. This implied that, in year-ended terms, growth was expected to decline somewhat in the near term before rising gradually.

There remained a degree of uncertainty about the momentum in the labour market. While the unemployment rate had edged down a little further in previous months, broader measures of labour underutilisation had not declined. This was consistent with part-time work having accounted for all of the increase in employment over the year to date and the relative strength of the household services sector, which employs a higher-than-average share of part-time workers. National accounts data had provided some further tentative evidence that growth in employee earnings had stabilised. This was consistent with less downward pressure on earnings associated with the movement of labour from mining to the non-mining sectors of the economy.

Conditions in the housing market had been mixed over prior months. The effects of tighter lending standards had been apparent in indicators such as the shares of interest-only loans and loans with high loan-to-valuation ratios in new lending, both of which had declined over the past year. Turnover had declined and housing credit growth had been steady at a noticeably lower rate than a year earlier. Although the rate of increase in housing prices had been lower than a year earlier, growth in housing prices and auction clearance rates had strengthened in Sydney and Melbourne in the months leading up to the meeting. Members noted that considerable supply of apartments was scheduled to come on stream over the next couple of years, particularly in the eastern capital cities. Overall, members assessed that while the risks associated with rapid growth in housing prices and lending had receded over the past year, developments would need to be monitored closely.

Since the September meeting, the data on the domestic economy had been broadly consistent with the forecasts presented in the August Statement on Monetary Policy. The adjustment to the decline in mining investment was well advanced; headwinds from that adjustment and the earlier fall in the terms of trade appeared to be waning. The adjustment had been assisted by low interest rates, which had been supporting domestic demand. In addition, the lower exchange rate since 2013 had been helping the traded sector, though an appreciating exchange rate could complicate this. There was a reasonable prospect of sustaining growth in economic activity that would support further employment growth and, in time, a gradual increase in wage growth and inflation. At the same time, however, there remained considerable uncertainty about momentum in the labour and housing markets.

Members noted that data on CPI inflation for the September quarter and an update of the forecasts would be available at the next meeting. This would provide an opportunity to consider the economic outlook, assess the effects of previous reductions in the cash rate and review conditions in the labour and housing markets. Taking account of developments since the previous meeting, the Board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.

 

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