Minutes of the Monetary Policy Meeting of the Reserve Bank Board
Perth – 1 December 2015
Glenn Stevens (Governor and Chair), Philip Lowe (Deputy Governor), John Akehurst, Roger Corbett AO, John Edwards, Kathryn Fagg, John Fraser (Secretary to the Treasury), Heather Ridout AO, Catherine Tanna
Guy Debelle (Assistant Governor, Financial Markets), Christopher Kent (Assistant Governor, Economic), Alexandra Heath (Head, Economic Analysis Department)
Anthony Dickman (Secretary), Peter Stebbing (Deputy Secretary)
International Economic Conditions
Members commenced their discussion of the global economy with the observation that growth in Australia's major trading partners had picked up in the September quarter, driven by an increase in growth in some Asian economies following weakness in the previous quarter. Overall, however, conditions across the Asian region, including in China and Japan, had been weaker than expected this year. Growth in the United States and the recovery in the euro area had continued. Core inflation had generally edged higher in both the advanced and emerging economies, but remained below most central banks' targets. Globally, monetary conditions remained very accommodative.
Commodity prices, notably those for iron ore and base metals, had declined further over the previous month, consistent with ongoing indications that growth in global industrial production and trade volumes had remained subdued. There had also been a significant decline in oil prices following a further increase in oil production. Weak investment growth across the major economic regions may have partly explained the relatively subdued growth in world merchandise exports over the previous few years or so.
Conditions in the manufacturing and construction sectors in China had remained subdued and the output of many industrial products remained below levels recorded in 2014. There was overcapacity in some parts of the Chinese economy and conditions were likely to become more difficult over time for a range of unprofitable firms in these sectors. Export and import volumes were lower than they had been in 2014, although iron ore imports from Australia appeared to have been steady over 2015. Residential property prices overall had increased a little in recent months, but the stock of unsold housing was substantial in many cities and real estate investment had remained weak. This implied that it could be some time before there was a pick-up in construction activity. In contrast, the rate of retail sales growth had been maintained over 2015. Nonetheless, consumer price inflation had remained low and producer prices had fallen at a faster rate recently, which was consistent with spare productive capacity in the industrial sector and lower commodity prices. In recent months, the Chinese authorities had eased monetary policy further and growth in government expenditure had increased. These policy actions were expected to provide further support for economic activity.
GDP in Japan had contracted for two consecutive quarters. Despite that, labour market conditions had remained tight and nominal wage growth had picked up over the past year. Core inflation had continued to edge higher, but remained below the Bank of Japan's 2 per cent target. In the rest of east Asia, GDP growth picked up in the September quarter after a soft June quarter outcome. Members noted that this stronger growth could reflect temporary factors and that weak external demand was likely to have negative effects on many economies in the region for some time. India was acknowledged to be a notable exception; domestic demand had continued to grow strongly and inflation had been contained at around 5 per cent, which was a little below the Reserve Bank of India's target.
Recent data confirmed that GDP in the United States had grown at a slightly slower pace in the September quarter, following strong growth in the previous quarter, although domestic demand had continued to grow at an above-average rate. There had been a further improvement in labour market conditions, including some signs that wage growth had picked up a little more recently, while unit labour costs (namely, wages adjusted for productivity) had grown at a rate over the past year that was close to their long-run average. Members noted, however, that core inflation had remained stable at a rate below the Federal Reserve's target.
The recovery in the euro area economy had continued, aided by further growth in consumption. The unemployment rate had declined further, although there was still significant spare capacity in much of the region. Core inflation was a little higher than it had been earlier in the year, but still well below the target of the European Central Bank (ECB).
Domestic Economic Conditions
Members noted that the September quarter national accounts would be released the day after the meeting. GDP growth looked to have picked up in the quarter, but was likely to have remained below average over the year. Resource exports and dwelling investment were expected to have made positive contributions to growth in the September quarter, following declines in the June quarter. Based on partial indicators, household consumption growth was likely to have increased in the September quarter but business investment was expected to have declined.
Growth in retail sales volumes had been a bit below average in the September quarter. Information from liaison contacts suggested that retail conditions had been more favourable recently and a range of other indicators pointed to some strengthening in the pace of household consumption growth since the middle of the year. Measures of consumer sentiment showed that perceptions of personal finances relative to a year earlier had been above average, consistent with low interest rates, lower oil prices and stronger employment growth. Motor vehicle sales to households had been on a steeper upward trend since the beginning of 2015.
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.
Conditions in the non-mining sector had also been supported by further growth in net service exports, consistent with the depreciation of the exchange rate. Resource exports had rebounded in the September quarter, following earlier disruptions to bulk commodity exports owing to unfavourable weather and unanticipated shutdowns of some liquefied natural gas facilities.
Employment growth had been strong in October and the unemployment rate had declined to 5.9 per cent, although in trend terms it remained in the 6–6¼ per cent range it had been in since the middle of 2014. Members observed that unemployment rates for most states were in the range of 5½–6½ per cent. Measures of job vacancies and advertisements pointed to continued growth in employment over the coming months. Wage inflation had remained subdued in the September quarter, consistent with spare capacity in the labour market and the forecast for a prolonged period of weak wage growth. The latest data suggested that wage growth had been little changed in the household services sector, where employment growth had been strongest.
Members' discussion of financial markets commenced with Australian developments. Although questions remained over the quality of housing credit data disaggregated by the categories of investors and owner-occupiers, there were signs that lending for housing to investors had eased and lending to owner-occupiers had picked up a little. Significant reclassifications of loans to investors to loans to owner-occupiers in recent months, reversing some of the reclassifications earlier in the year, made determining the current rate of growth of the two categories difficult. Most mid-sized housing lenders in Australia had increased their standard variable lending rates by 15–20 basis points in November, despite not being subject to the same capital increases on housing loans as the major banks. Overall, by the end of November, housing loan rates for owner-occupiers had risen to their levels around the middle of the year, while those for investors had risen by more, to be back to their levels at the beginning of the year. Members noted that strong competition in the banking sector meant that business lending rates had remained at historic lows for both small and large businesses.
Yields on money market instruments in Australia at the end of November implied only a small probability of a reduction in the cash rate at the present meeting.
Internationally, the divergent outlooks for monetary policy in the United States and Europe continued to be the main driver of financial market developments. In the United States, market expectations of a rise in the federal funds rate in December had increased over the past month following stronger-than-expected labour force data, such that pricing implied at least a three-in-four chance of a rate rise at the December meeting of the Federal Open Market Committee. In Europe, further stimulus was thought likely at the ECB's next policy meeting in December. In Japan, expectations remained that further stimulus would be provided by the Bank of Japan, even though that had not been signalled at the most recent policy meetings.
The differing expectations for monetary policy in the major economies had been reflected in higher US Treasury yields over the past month and German short-end yields declining to a historically low level of −0.4 per cent. Members noted that around half of outstanding German sovereign bonds were trading with negative yields, as was a significant share of other European sovereigns.
The differing outlooks for monetary policies among the major jurisdictions were also apparent in exchange rates, with the US dollar appreciating over the past month while the euro and yen had both depreciated. The Chinese renminbi had been little changed against the US dollar. Members noted that the International Monetary Fund had approved the inclusion of the renminbi in the Special Drawing Right currency basket from 1 October 2016. In contrast to most other currencies, the Australian dollar had appreciated against the US dollar and on a trade-weighted basis over the past month to be a little above its recent lows.
Global equity prices were little changed over November, but remained higher over the year. The Chinese market in particular had moved sharply in both directions, but showed little net change over the year to date. Australian equity prices had underperformed other developed equity markets over the course of 2015, weighed down by resources stocks, whose prices had fallen along with broad-based falls in commodity prices.
Considerations for Monetary Policy
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.
The Board decided to leave the cash rate unchanged at 2.0 per cent.