Reserve Bank in a happy place, confidence eases: CommSec's Savanth Sebastian

Reserve Bank in a happy place, confidence eases: CommSec's Savanth Sebastian
Reserve Bank in a happy place, confidence eases: CommSec's Savanth Sebastian


The Reserve Bank Board minutes provide little in the way of new information for consumers or businesses.

It is clear the Board members remain relatively optimistic on the domestic economy and believes that recent rate cuts were having an impact in lifting consumption.

However while the minutes acknowledge the depreciation of the Australian dollar, there was still the usual jawboning on the need for a lower Aussie dollar, with Board members noting that “an appreciating exchange rate could complicate the necessary adjustments in the economy”.

Interestingly the minutes suggested that the Central Bank was clearly less concerned about the housing sector – essentially a property bubble is no longer on its wall of worry. Nevertheless policymakers did discuss the substantial lift in apartment building that is taking place particularly across the Eastern states.

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Reserve Bank in a happy place, confidence eases: CommSec's Savanth Sebastian


The pipeline of dwelling construction will support growth however does increase risks of an oversupply of apartments in 12-18 months times. 

Overall the minutes seemed to be more of a neutral setting rather than one that suggested further rate cuts were on the cards. But policymakers are well aware that the low inflation environment provides the central bank with scope to cut rates further if deemed necessary.

The next round of inflation data is released in late October and essentially means that the mostly likely scenario for another rate cut would be at the November Board meeting – provided inflation remains well below the 2-3 percent target band.
The Bureau of Statistics has released data on home prices for the March quarter. However the better measures on home prices are those produced by CoreLogic RP Data. Overall it is clear that higher home prices are boosting wealth levels and supporting consumer spending.

The modest decline in the weekly consumer sentiment reading is not concerning – particularly given confidence levels have lifting substantially in prior weeks. Overall consumers are in a happy place, particularly with household budgets in good order.

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Reserve Bank in a happy place, confidence eases: CommSec's Savanth Sebastian

What do the figures show?

Reserve Bank Board minutes

The key quotes from the Board minutes:

Economic growth: “data suggested that growth had been around estimates of potential growth over the first half of 2016, despite further large falls in business investment. Interest-sensitive sectors of the economy were being supported by accommodative monetary policy.”
Unemployment: “The unemployment rate had been little changed at around 53⁄4 per cent over 2016 and employment growth had been steady at around 2 percent in year-ended terms. Strong growth in part-time employment had been apparent in most states, while full-time employment had fallen in the mining-exposed states. Forward-looking indicators had been consistent with only a slight change in the unemployment rate in coming months. Domestic cost pressures, including wage growth, had remained low and were expected to remain so for some time.”

Housing sector: “Housing market conditions overall appeared to have eased since the previous year, although the dwelling construction cycle remained in a strong upswing. The best available information suggested that housing prices had risen modestly over the past year and turnover had been below average. Consistent with this and supervisory measures that had strengthened lending standards in the housing market, housing credit growth had slowed over 2016. Members noted that there continued to be a considerable volume of apartments scheduled to be completed over the next couple of years, particularly in the eastern states”.

Summary: “Taking into account the recent data, and having eased monetary policy at its May and August meetings, the Board judged that the current stance of monetary policy was consistent with sustainable growth in the Australian economy and achieving the inflation target over time...”

Consumer confidence

The ANZ/Roy Morgan consumer confidence rating fell by 2.2 per cent to 115.5 in the week to September 18. Confidence is up 0.9 per cent over the year and well above the average of 112.6 since 2014. All five components of the index fell in the latest week:

  •   The estimate of family finances compared with a year ago was down from +12 to +10;
  •   The estimate of family finances over the next year was down from +27 to +25;
  •   Economic conditions over the next 12 months was down from +2 to +1;
  •   Economic conditions over the next 5 years was down from +10 to +9;

  The measure of whether it was a good time to buy a major household item was down from +40 points to +33 points.

Residential property prices

The Bureau of Statistics (ABS) has released its Residential Property Price indexes.

“The price index for residential properties for the weighted average of the eight capital cities rose 2.0 percent in the June quarter 2016. The index rose 4.1 per cent through the year to the June quarter 2016”.

The capital city residential property price indexes fell in Sydney (+2.8 percent), Melbourne (+2.7 percent), Brisbane (+1.1 percent), Canberra (+2.2 percent), Adelaide (+0.8 percent) and Hobart (+0.7 percent) and fell in Perth (-1.2 percent) and Darwin (-2.4 percent).

Annually, residential property prices rose in Melbourne (+8.2 percent), Canberra (+6.0 percent), Hobart (+4.9 percent), Brisbane (+4.3 percent), Sydney (+3.6 percent) and Adelaide (+3.5 percent) and fell in Darwin (-6.5 percent) and Perth (-4.8 percent)”. 
The ABS notes that as at June 2016 there were 9.703 million homes in Australia.
  “The total value of residential dwellings in Australia was $6,045,080.8m at the end of the June quarter 2016, rising $138,302.8m over the quarter.
  The mean price of residential dwellings rose $11,800 to $623,000 and the number of residential dwellings rose by 39,100 to $9,703,500 in the June quarter 2016”.
What is the importance of the economic data?
The ANZ/Roy Morgan weekly survey of consumer confidence closely tracks the monthly Westpac/Melbourne Institute consumer sentiment index but the former measure is a timelier assessment of consumer attitudes and is now closely tracked by the Reserve Bank.
The Australian Bureau of Statistics (ABS) provides quarterly data on residential prices. The figures provide further perspectives on the state of the housing purchase sector.
The Reserve Bank releases minutes of its monthly Board meeting a fortnight after the event. The minutes give a guide to Reserve Bank thinking on interest rate settings.
Reserve Bank in a happy place, confidence eases: CommSec's Savanth Sebastian

What are the implications for interest rates and investors?

Future rate cuts are wholly dependent on inflation. If the next inflation figures are even slightly above RBA and market forecasts, then the Reserve Bank Board members will stay on the interest rate sidelines. For the record CommSec has a further interest rate cut pencilled in for the November meeting.
Consumer confidence is healthy and is supporting a lift in spending - a result that was largely confirmed in the latest Commonwealth Bank Business Sales Index. 
Savanth Sebastian is an economist for CommSec
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