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Economics | February 7 2017
Reserve Bank prepares for a long wait on rates
Reserve Bank Board meeting
 The Reserve Bank has left the cash rate at a record low of 1.50 per cent. The Reserve Bank has maintained
its “neutral stance” – meaning rate hikes are as likely as rate cuts in the period ahead.
What does it all mean?

There are a number of ‘hot button’ issues to monitor at present: home prices; inflation, the Aussie dollar and the
outlook for the US & global economy. So what are the current RBA views? Well, in typical economist parlance,
there is a lot of ‘on the one hand this, on the other hand that’. For instance: “conditions in the housing market vary
considerably around the country”; “Labour market indicators continue to be mixed”; and “the economy is
continuing its transition”.

Importantly though, the Reserve Bank remains positive. The global economy has “improved”; domestic economic
growth is forecast around 3 per cent; and headline inflation is tipped to lift to over 2 per cent in 2017. So while the
Reserve Bank is sticking with its “neutral stance”, it clearly won’t be cutting rates anytime soon.
Perspectives on interest rates

The Reserve Bank has left the cash rate at 1.50 per cent. The previous rate cut was in August 2016 (25 basis
points). There have now been 12 rate cuts since November 2011, cutting rates from 4.75 per cent to 1.50 per
cent.

The Reserve Bank had previously lifted rates seven times from October 2009 to November 2010 – a total of 1.75
percentage points, from 3.00 per cent to 4.75 per cent.
What are the implications of today’s decision?

If the Reserve Bank was to change rates in coming months, the trigger is more likely to emerge from overseas,
probably a development from policies adopted by the new US Government. For instance, stimulatory policies
could serve to lift the US, and the broader global economy, in turn boosting inflation. In that event, rate hikes
would be more likely in Australia than rate cuts.

Conversely, if the fiscal stimulus doesn’t emerge in the US,
rather protectionist actions are advanced, that could serve to
restrain global economic growth, stifle inflation pressures and
cause Australia’s Reserve Bank to cut rates to protect
domestic activity.

Oil prices need to be watched carefully in coming months. If
key oil nations continue to comply with new production targets
and support oil prices, then deflationary fears will continue to
ease.

Fixed-term interest rates have lifted sharply over the past six
months. But future moves will be dependent on European
elections in 2017 as well as US monetary and fiscal policies.
Bank depositors are getting better returns at present, but still
returns remain more attractive amongst blue-chip listed
companies.
Craig James, Chief Economist (Author)
Twitter: @CommSec
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Economic Insights: Reserve Bank prepares for a long wait on rates

The Reserve Bank will especially watch the following in coming months: US fiscal policy; Chinese economic
activity; commodity markets; Australian home prices; inflation expectations; and the local job market.

We expect the Reserve Bank to stay on the interest rate sidelines for the 2017 year.
Comparing the two most recent statements

The statement from the December 2016 meeting is on the left; the statement from today’s February 2017 meeting
is on the right. Emphasis has been added to significant changes in the wording in the statements.
Media Release
Media Release
No: 2016-30
Date: 6 December 2016
Embargo: For Immediate Release
No: 2017-02
Date: 7 February 2017
Embargo: For Immediate Release
Statement by Philip Lowe, Governor:
Monetary Policy Decision
Statement by Philip Lowe, Governor:
Monetary Policy Decision
At its meeting today, the Board decided to leave the cash rate unchanged at
1.50 per cent.
At its meeting today, the Board decided to leave the cash rate unchanged at
1.50 per cent.
The global economy is continuing to grow, at a lower than average pace.
Labour market conditions in the advanced economies have improved over the
past year. Economic conditions in China have steadied, supported by growth
in infrastructure and property construction, although medium-term risks to
growth remain. Inflation remains below most central banks’ targets, although
headline inflation rates have increased recently. Globally, the outlook for
inflation is more balanced than it has been for some time.
Conditions in the global economy have improved over recent months.
Business and consumer confidence have both picked up. Above-trend growth
is expected in a number of advanced economies, although uncertainties
remain. In China, growth was stronger over the second half of 2016,
supported by higher spending on infrastructure and property construction.
This composition of growth and the rapid increase in borrowing mean that the
medium-term risks to Chinese growth remain. The improvement in the global
economy has contributed to higher commodity prices, which are providing a
boost to Australia's national income.
Commodity prices have risen over the course of this year, reflecting both
stronger demand and cut-backs in supply in some countries. The higher
commodity prices have supported a rise in Australia’s terms of trade, although
they remain much lower than they have been in recent years. The higher
prices are providing a boost to national income.
Financial markets are functioning effectively. Government bond yields have
risen further with the adjustment having been orderly. Funding costs for some
borrowers have also risen, but remain low. Globally, monetary policy remains
remarkably accommodative.
In Australia, the economy is continuing its transition following the mining
investment boom. Some slowing in the year-ended growth rate is likely,
before it picks up again. Further increases in exports of resources are
expected as completed projects come on line. The outlook for business
investment remains subdued, although measures of business sentiment
remain above average.
Labour market indicators continue to be somewhat mixed. The unemployment
rate has declined this year, although some measures of labour underutilisation
are little changed. There continues to be considerable variation in employment
outcomes across the country. Part-time employment has been growing
strongly, but employment growth overall has slowed. The forward-looking
indicators point to continued expansion in employment in the near term.
Inflation remains quite low. The continuing subdued growth in labour costs
means that inflation is expected to remain low for some time, before returning
to more normal levels.
Low interest rates have been supporting domestic demand and the lower
exchange rate since 2013 has been helping the traded sector. Financial
institutions are in a position to lend for worthwhile purposes. These factors are
assisting the economy to make the necessary adjustments, though an
appreciating exchange rate could complicate this.
Conditions in the housing market have strengthened overall, although
they vary considerably around the country. In some markets, prices are
rising briskly, while in others they are declining. Housing credit has picked up
a little, although turnover of established dwellings is lower than it was a year
ago. Supervisory measures have strengthened lending standards and some
lenders are taking a more cautious attitude to lending in certain segments.
Considerable supply of apartments is scheduled to come on stream over the
next couple of years, particularly in the eastern capital cities. Growth in rents
is the slowest for some decades.
Taking account of the available information, and having eased monetary
policy earlier in the year, 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.
Headline inflation rates have moved higher in most countries, partly reflecting
the higher commodity prices. Long-term bond yields have also moved higher,
although in a historical context they remain low. Interest rates have increased
in the United States and there is no longer an expectation of further monetary
easing in other major economies. Financial markets have been functioning
effectively and stock markets have mostly risen.
In Australia, the economy is continuing its transition following the end of the
mining investment boom. GDP was weaker than expected in the September
quarter, largely reflecting temporary factors. A return to reasonable growth
is expected in the December quarter.
The Bank's central scenario remains for economic growth to be around 3 per
cent over the next couple of years. Growth will be boosted by further
increases in resource exports and by the period of declining mining
investment coming to an end. Consumption growth is expected to pick up
from recent outcomes, but to remain moderate. Some further pick-up in nonmining business investment is also expected.
The outlook continues to be supported by the low level of interest rates.
Financial institutions remain in a position to lend. The depreciation of the
exchange rate since 2013 has also assisted the economy in its transition
following the mining investment boom. An appreciating exchange rate would
complicate this adjustment.
Labour market indicators continue to be mixed and there is considerable
variation in employment outcomes across the country. The unemployment
rate has moved a little higher recently, but growth in full-time employment
turned positive late in 2016. The forward-looking indicators point to continued
expansion in employment over the period ahead.
Inflation remains quite low. The December quarter outcome was as
expected, with both headline and underlying inflation of around 1½ per
cent. The Bank's inflation forecasts are largely unchanged. The continuing
subdued growth in labour costs means that inflation is expected to remain low
for some time. Headline inflation is expected to pick up over the course of
2017 to be above 2 per cent, with the rise in underlying inflation expected to
be a bit more gradual.
Conditions in the housing market vary considerably around the country.
In some markets, conditions have strengthened further and prices are rising
briskly. In other markets, prices are declining. In the eastern capital cities, a
considerable additional supply of apartments is scheduled to come on stream
over the next couple of years. Growth in rents is the slowest for a couple of
decades. Borrowing for housing has picked up a little, with stronger demand
by investors. With leverage increasing, supervisory measures have
strengthened lending standards and some lenders are taking a more cautious
attitude to lending in certain segments.
Taking account of the available information, and having eased monetary
policy in 2016, 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.
February 7 2017
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