18/10/2013 - 05:11

Softly, softly monetary policy

18/10/2013 - 05:11

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With the RBA hinting at sub-trend growth, there’s little chance of a change in interest rates in the near term.

The minutes of the most recent RBA meeting again conclude by noting that: "Members agreed that the bank should again neither close off the possibility of reducing rates further nor signal an imminent intention to reduce them."

That leaves, in our view, the guidance out of these minutes little changed versus September. Namely, the RBA retains an easing bias, although with no apparent intention to act on that bias in the near term.

That easing bias is, by way of example, reflected in the statement that: "The information to hand at the meeting was consistent with growth of economic activity remaining below trend over the next year or so before an expected pickup."

That means the RBA's base case is one of sub-trend growth for some time yet.

Our own view remains that the cash rate is likely to remain at 2.50 per cent through to the end of 2013 (and 2014 for that matter), with some likelihood that growth will return to 'trend' a little ahead of the RBA's forecast.

Getting above-trend growth in an environment of weakness in business investment will be difficult, which is, in part, why we don't expect an increase in the cash rate during 2014.

Coming back to the minutes, the board also observed: "Two developments over the past month, namely the appreciation of the exchange rate and the pick-up in measures of both consumer and business confidence over recent weeks. It was difficult to know how significant the effects of either of these developments would be, partly because it was uncertain whether they would be sustained."

Our reading of this is that as far as the stance of policy is concerned, the net effect for now of the rise in the Australian dollar was essentially neutralised by the rise in confidence.

On housing, the minutes observe that: "The effect of low interest rates was evident across a range of indicators and had further to run. House prices and turnover had increased and leading indicators pointed to a pick-up in dwelling investment over the period ahead. While credit growth remained moderate, there were signs of an increased appetite for borrowing, most notably among investors."

Finally, we note that the board was briefed on changes in "the industry composition of output and employment".

"The share of economic activity occurring in service industries had increased over time" and "over the past decade, the bulk of the increase in employment had been in service industries," the minutes said.

We undertook such an exercise on the employment front in an article in September 2013, in which we noted that the Australian economy has created almost 4 million jobs over the past 20 years.

Slightly more than 2 million of these jobs have been created in what we broadly consider 'private sector services'. Elsewhere across the economy we found 1.3 million jobs have been created in what could be termed 'largely government' (ie education, health, and public administration and defence). The construction sector (which is difficult to put in a box given its links across the economy) has created about 500,000 jobs over 20 years.

By way of contrast, only 22,900 jobs have been created across the agriculture, mining, manufacturing and utilities sectors since 1993 (with gains in mining and utilities offset by losses in manufacturing and agriculture).

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