Statement by Deus Forex Machina, Governor – in a parallel universe – 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. Signs are emerging, however, of a slowdown in the developed economies as the impact of fiscal and monetary stimulus fades. The Japanese earthquake continues to have a severe impact on Japanese GDP and their remain signs that manufacturing production continues to be interrupted in other jurisdictions.
Commodity prices have slowed their recent pace of appreciation in part because the USD has found a short term base and the impact of the slowing developed economies. This should slow the pace of CPI inflation that we have seen for some months. Evidence that less accommodative monetary policy in a number of countries is biting has become apparent over the past few months and financial conditions have deteriorated as a result of the lack of resolution to banking and sovereign debt issues in Europe.
Australian growth was negative in the first quarter of 2011 because of disruptions associated with the recent floods and natural disasters over summer. This weakness was worse than we forecast in the recent Statement on Monetary Policy and, even though production levels should recover over the months ahead, growth is unlikely to achieve the forecasts embedded in the SoMP.
Australia’s terms of trade continue to reach even higher levels and national income is growing strongly notwithstanding the Q1 GDP setback. Private investment continues to be the one true bright spot in the domestic economy and is picking up, mainly in the resources sector, in response to high levels of commodity prices. Caution remains apparent in the household sector with the savings rate hitting 11.5% in the first quarter GDP. Caution in borrowing and spending continues.
Growth in employment has continued to moderate over recent months with the -22,000 print for March although unemployment has remaind steady around 5%. Leading indicators, such as NAB Business survey, suggest further slippage in the growth in employment ahead. 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. This bears watching over the coming months. The exchange rate remains, in real effective terms, at its highest level in several decades. This, if sustained, could be expected to exert additional restraint on the traded sector further exacerbating an economy under pressure from household weakness.
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.
While our central tenancy remains that the mining boom is providing a substantial stimulus to the Australian economy and putting pressure on capacity in both labour and product markets, uncertainty offshore and continued household retrenchment means that the risks to this medium term outlook have risen.
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 movements in the global economy and markets and how these are impacting on Australian households and asset prices and by definition the evolving outlook for growth, as well as inflation.
Governor, in a parellel universe, Deus Forex Machina