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Economics | October 6 2015

Contentment: neutral stance maintained Reserve Bank Board meeting The cash rate has been left at a record low of 2.00 per cent for a fifth month (six months of rates at 2 per

cent). The Reserve Bank has left the accompanying statement the same – almost word-for-word.

The Aussie dollar rose by a third of a cent as investors gave up on hopes for a rate cut in the future.

What does it all mean? In outlining where the Reserve Bank stands on interest rate settings, the Governor recently told the House of

Representatives Economics Committee, "I think we are pretty content where we are right now.” And little more needs to be said.

The key question now, is what will be the next move on rates? It is clear to us that the economy is picking up momentum but there are still challenges ahead, so interest rates should remain on hold. But there is certainly no case for rate cuts. Consider:

Car sales are at record highs

Building approvals are at record highs

Job ads have lifted for 14 of the last 16 months

Employment has posted the biggest 6-month gain in 4½ years

Manufacturing & services sectors are expanding

The Aussie dollar has fallen around US17 cents over the past year

The only real changes to the text of the statement. In September: “Equity markets have been considerably more volatile of late, associated with developments in China, though other financial markets have been relatively stable”. In October: “Equity market volatility has continued, but the functioning of financial markets generally has not, to date, been impaired.”

Also, in September: “The Bank is working with other regulators to assess and contain risks that may arise from the housing market.” In October: “Regulatory measures are helping to contain risks that may arise from the housing market.”

The only other change: the Reserve Bank noted “Dwelling prices continue to rise strongly in Sydney and Melbourne…” In September it only referred to prices in Sydney.

Bottom line is that there has been no change to the neutral policy stance – a stance that suggests that the next move in rates could be either up or down.

Perspectives on interest rates The previous rate cut was in May 2015 (25 basis points), taking

the cash rate to a record low of 2.00 per cent.

There have been 10 rate cuts since November 2011.

The Reserve Bank had previously lifted rates seven times from

Economic Insights

October 6 2015 2

Economic Insights: Contentment: Neutral stance maintained

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? CommSec expects the cash rate to remain unchanged over the next year. There is certainly no case to cut rates

at present, but it is far too early to be talking about rate hikes given that inflation is still low and broad economic growth rates are below “normal”.

At present, Aussie households are devoting around 22 per cent of their assets to cash & bank deposits, broadly in line with the longer-term average. But with interest rates at record lows, arguably a smaller proportion of assets should be held in these safe-haven assets. Aussie investors will need to continue to re-calibrate their holdings in a low rate environment.

Comparing the two most recent statements The statement from the September 2015 meeting is on the left; the statement from today’s October 2015 meeting

is on the right. Emphasis has been added to significant changes in the wording in the statements.

Media Release

No: 2015-18 Date: 6 October 2015 Embargo: For Immediate Release

Statement by Glenn Stevens, Governor: Monetary Policy Decision

At its meeting today, the Board decided to leave the cash rate unchanged at 2.0 per cent.

The global economy is expanding at a moderate pace, with some further softening in conditions in China and east Asia of late, but stronger US growth. Key commodity prices are much lower than a year ago, in part reflecting increased supply, including from Australia. Australia's terms of trade are falling.

The Federal Reserve is expected to start increasing its policy rate over the period ahead, but some other major central banks are continuing to ease policy. Equity market volatility has continued, but the functioning of financial markets generally has not, to date, been impaired. Long-term borrowing rates for most sovereigns and creditworthy private borrowers remain remarkably low. Overall, global financial conditions remain very accommodative.

In Australia, the available information suggests that moderate expansion in the economy continues. While growth has been somewhat below longer-term averages for some time, it has been accompanied with somewhat stronger growth of employment and a steady rate of unemployment over the past year. Overall, the economy is likely to be operating with a degree of spare capacity for some time yet, with domestic inflationary pressures contained. Inflation is thus forecast to remain consistent with the target over the next one to two years, even with a lower exchange rate.

In such circumstances, monetary policy needs to be accommodative. Low interest rates are acting to support borrowing and spending. Credit is recording moderate growth overall, with growth in lending to the housing market broadly steady over recent months. Dwelling prices continue to rise strongly in Sydney and Melbourne, though trends have been more varied in a number of other cities. Regulatory measures are helping to contain risks that may arise from the housing market. In other asset markets, prices for commercial property have been supported by lower long-term interest rates, while equity prices have moved lower and been more volatile recently, in parallel with developments in global markets. The Australian dollar is adjusting to the significant declines in key commodity prices.

The Board today judged that leaving the cash rate unchanged was appropriate at this meeting. Further information on economic and financial conditions to be received over the period ahead will inform the Board's ongoing assessment of the outlook and hence whether the current stance of policy will most effectively foster sustainable growth and inflation consistent with the target.

Media Release

No: 2015-15 Date: 1 September 2015 Embargo: For Immediate Release

Statement by Glenn Stevens, Governor: Monetary Policy Decision

At its meeting today, the Board decided to leave the cash rate unchanged at 2.0 per cent.

The global economy is expanding at a moderate pace, with some further softening in conditions in China and east Asia of late, but stronger US growth. Key commodity prices are much lower than a year ago, in part reflecting increased supply, including from Australia. Australia's terms of trade are falling.

The Federal Reserve is expected to start increasing its policy rate over the period ahead, but some other major central banks are continuing to ease policy. Equity markets have been considerably more volatile of late, associated with developments in China, though other financial markets have been relatively stable. Long-term borrowing rates for most sovereigns and creditworthy private borrowers remain remarkably low. Overall, global financial conditions remain very accommodative.

In Australia, most of the available information suggests that moderate expansion in the economy continues. While growth has been somewhat below longer-term averages for some time, it has been accompanied with somewhat stronger growth of employment and a steady rate of unemployment over the past year. Overall, the economy is likely to be operating with a degree of spare capacity for some time yet, with domestic inflationary pressures contained. Inflation is thus forecast to remain consistent with the target over the next one to two years, even with a lower exchange rate.

In such circumstances, monetary policy needs to be accommodative. Low interest rates are acting to support borrowing and spending. Credit is recording moderate growth overall, with growth in lending to the housing market broadly steady over recent months. Dwelling prices continue to rise strongly in Sydney, though trends have been more varied in a number of other cities. The Bank is working with other regulators to assess and contain risks that may arise from the housing market. In other asset markets, prices for commercial property have been supported by lower long-term interest rates, while equity prices have moved lower and been more volatile recently, in parallel with developments in global markets. The Australian dollar is adjusting to the significant declines in key commodity prices.

The Board today judged that leaving the cash rate unchanged was appropriate at this meeting. Further information on economic and financial conditions to be received over the period ahead will inform the Board's ongoing assessment of the outlook and hence whether the current stance of policy will most effectively foster sustainable growth and inflation consistent with the target.

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