Latest NewsReserve Bank Board Adopts Wait and See PolicyTuesday, 16 August 2016

RBA Board minutes;    ABARE crop report 

• Reserve Bank Board members agreed on “a wait and see” policy at the last interest rate meeting, noting the significant improvement in economic conditions in domestic and global economies.
• Board members noted the significant stimulus injected into the Australian economy: “that the fiscal expansion, together with the monetary policy easing over recent months, represented the largest macroeconomic policy stimulus over recent decades”.
• Australia’s chief commodity forecaster, ABARE, expects Australian winter crop production to have increased by 5 per cent to 34.8 million tonnes. Forecasts for Australia’s 2009/10 wheat crop is expected to rise by 2.7 per cent to 21.9Mt.

What does it all mean?

• It is pretty clear from the minutes of the latest Reserve Bank Board meeting that the Board believes that the best approach is to hold off on any further rate cuts in the short term. The Reserve Bank Board has indicated that the Australian economy has been front loaded with more than enough ammunition to combat the current downturn, and the domestic economy is showing signs of having passed through the worst of the downturn.
• A quiet confidence is perceived in the Board minutes with members noting that the global economy has shown signs of improvement. In particular members focused on the strong initial recovery recorded in China. Importantly board members believed that the Chinese economy would continue to record solid growth outcomes in the near term.
• A qualitative assessment of the Reserve Bank Board by CommSec highlights the more optimistic tone of the meeting. Only 17 per cent of the statement highlighted a negative viewpoint while a resounding 60 per cent of the statement was more positive. The Board clearly believed that with interest rates at 49 years lows and significant fiscal stimulus currently been undertaken, it was having an expansionary effect on the Australian economy. However gauging the size and extent of recovery was the difficult part. As a result the Reserve Bank decided the more prudent course was to keep rates on hold.
• The Reserve Bank is in effect holding back on any future rate cuts unless they become absolutely necessary. Certainly the weak inflation outlook will ensure that if further rate cuts are needed the board is available to provide them.
• At this stage the Reserve Bank looks likely to keep rates on hold in up coming months. However CommSec is not ruling out the possibility of another rate cut of 25 basis points over the last quarter of this year.
• While the global recession dominates headlines, farmers can look to more improving conditions. The rains over late May and Early June have ensured that the upcoming winter harvest is likely to be significantly higher than a year ago. Importantly the one area that is still uncertain is Western Australia where farmers are still waiting on healthy rains. The combination of higher production, favourable prices and a lower Australian dollar points to better prospects for farm incomes.

What do the figures show?

• The Australian Bureau of Agricultural and Resource Economics (ABARE) expects Australian winter crop production to have increased by 5 per cent to 34.8 million tonnes on a year ago.
• Forecasts for Australia’s 2009/10 wheat crop are expected to rise by 2.7 per cent to 21.9Mt. ABARE did note that rainfall in May and June was timely for crop sowing in the Eastern and Southern states while Western Australian crop production is still uncertain with conditions still dry.
• Barley production is tipped to rise from 6.8Mt over 2008-09 to 7.7Mt. Canola crop production is estimated at 1.7 million tonnes, down from 1.9 million tonnes in 2008-09. Sorghum production will fall 17pct in the year to 1.9 million tonnes, while cotton seed production will rise 35 per cent to 604,000 tons in 2010.

Minutes from the May Reserve Bank Board meeting

Key Comments:

• “Members took particular note of the strong recovery in Chinese industrial production and the pick-up in production in a number of east Asian economies, including Japan. The story was not as positive in the western advanced economies, where industrial production was still falling in the United States and the Euro area, albeit at a slower rate in the former.”

• “Recent data provided further signs that growth had picked up in China. Members noted the very large increases in fixed capital investment by the public sector and the strong credit growth..”

• “Members noted that the rate of decline in output in the advanced economies was slowing. Although recent data for the United States had been mixed, there were some signs that the rate of deterioration in the labour market had slowed.”

• “The Euro area economy remained in recession. In most countries, GDP in the March quarter had fallen by more than in the December quarter, with Germany in particular recording a large fall” ….

• “Members concluded their discussion of the world economy by observing that, despite the slightly more positive data for the world economy as a whole, a considerable degree of uncertainty regarding prospects for recovery remained. Growth was likely to be below trend for some time, and spare capacity and unemployment were expected to rise”

• Retail sales: “These data showed that the level of spending was about 5 per cent higher than in November last year, with the recent fiscal stimulus packages a factor in this growth. Liaison conducted by the staff indicated that retail conditions had been strong in May, partly reflecting the tax bonus payments in the second half of April and early May.”

• Business investment: “business investment in the March quarter recorded a large decline, with falls in spending on both equipment and buildings & structures. In addition, business expectations about future investment spending were downgraded. However, in contrast to many other economies, investment as a share of GDP was not expected to fall to unusually low levels, in large part because of continuing high levels of investment in the mining sector.”

• Exports: “exports in the March quarter had been remarkably strong, especially in light of the large decline in global trade that had taken place since late last year. Rural exports, notably wheat, had risen strongly, and there had been a smaller fall in manufacturing exports than that experienced in some other countries.”

• Financial markets: “Members were informed that the general improvement in conditions in credit markets had continued. A significant rise in government bond yields was consistent with that improvement, but also suggested that concerns were rising about the global supply of sovereign debt.”

• “Global credit spreads had fallen further during the month and were now at levels prevailing prior to the collapse of Lehman Brothers in September last year. Domestic money market spreads had declined to around the lowest points since the onset of the financial crisis.”

• Outlook: “In Australia, the economy was experiencing a downturn but, on the information available so far, this would be less severe than in most other countries. Here too the outlook was for a fairly gradual expansion getting under way later in the year, with spare capacity tending to increase and inflation tending to decline. Recent information had not led to any downward revision to the outlook; if anything, some indicators had been on the stronger side.”

• Policy decision: “Monetary policy had been eased significantly, and budgetary measures were also providing significant support to demand. Indications were that these policies were having some impact, though the full effects would take time yet to be seen. Board members did not see a pressing case for any further action at this meeting, though they viewed the inflation outlook as affording scope for some further easing of monetary policy.”

What are the implications for interest rates and investors?

• CommSec is pencilling in a small 25 basis point rate cut later in the year – just in case. In the current environment it looks more likely that rates will be left on hold. Still, with longer term interest rates and funding costs for banks rising the potential for one further rate cuts is on the cards.

Source CommSec