The RBA has pretty much delivered market expectations with a hold and more hawkish statement. However, this is not as hawkish as I might have expected, with a strong nod toward both tradable goods sectors and housing. Options look open for next month. The debate will rage!
Statement by Glenn Stevens, Governor: Monetary Policy Decision
At its meeting today, the Board decided to leave the cash rate unchanged at 4.75 per cent.
The global economy is continuing its expansion, led by very strong growth in the Asian region. The recent disaster in Japan is having a major impact on Japanese production, and some effects on production of manufactured products further afield. Commodity prices, including oil prices, have generally continued to rise over recent months, pushing up measures of consumer price inflation in many countries. A number of countries have been moving to tighten their monetary policy settings. Overall, though, financial conditions for the global economy remain accommodative. Uncertainty remains over the prospects for resolution of the banking and sovereign debt issues in Europe.
Australia’s terms of trade are reaching higher levels than assumed a few months ago, and national income is growing strongly. Private investment is picking up, mainly in the resources sector, in response to high levels of commodity prices. In the household sector thus far, in contrast, there continues to be caution in spending and borrowing, and a higher rate of saving out of current income.
The natural disasters over the summer have reduced output in some key sectors and the resumption of coal production in flooded mines is taking longer than initially expected. It is likely this caused a decline in real GDP in the March quarter. Production levels should, however, recover over the months ahead, and there will be a mild boost to demand from the rebuilding efforts as they get under way. Over the medium term, overall growth is likely to be at trend or higher.
Growth in employment has moderated over recent months and the unemployment rate has been little changed, near 5 per cent. Most leading indicators suggest further growth in employment, though most likely at a slower pace than in 2010. Reports of skills shortages remain confined, at this point, to the resources and related sectors. After the significant decline in 2009, growth in wages has returned to rates seen prior to the downturn.
Overall credit growth remains quite modest. Signs have continued to emerge of some greater willingness to lend, and business credit has resumed growth after a period of contraction. Growth in credit to households, on the other hand, has softened recently, as have housing prices in several cities. The exchange rate has risen further and, in real effective terms, is at its highest level in several decades. This, if sustained, could be expected to exert additional restraint on the traded sector.
Recent data on inflation show the effects of production losses due to the floods and Cyclone Yasi. The affected prices should fall back later in the year, though substantial rises in utilities prices are still occurring. The Bank expects that, as the temporary price shocks dissipate over the coming quarters, CPI inflation will be close to target over the year ahead.
Looking through these short-term movements, however, the recent information suggests that the marked decline in underlying inflation from the peak in 2008 has now run its course. While the rising exchange rate will be helping to hold down prices for some consumer products over the coming few quarters, over the longer term inflation can be expected to increase somewhat if economic conditions evolve broadly as expected.
At today’s meeting, the Board judged that the current mildly restrictive stance of monetary policy remained appropriate. In future meetings, the Board will continue to assess carefully the evolving outlook for growth and inflation.