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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 Produced by Commonwealth Research based on information available at the time of publishing. We believe that the information in this report is correct and any opinions, conclusions or recommendations are reasonably held or made as at the time of its compilation, but no warranty is made as to accuracy, reliability or completeness. To the extent permitted by law, neither Commonwealth Bank of Australia ABN 48 123 123 124 nor any of its subsidiaries accept liability to any person for loss or damage arising from the use of this report. The report has been prepared without taking account of the objectives, financial situation or needs of any particular individual. For this reason, any individual should, before acting on the information in this report, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice. 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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 2