Reserve Bank Board remains cautiously optimistic: Savanth Sebastian

Reserve Bank Board remains cautiously optimistic: Savanth Sebastian
Reserve Bank Board remains cautiously optimistic: Savanth Sebastian
GUEST OBSERVER
 
Reserve Bank Board minutes: The minutes from the July 4 Board meeting shows the Reserve Bank weighing up a raft of factors including the strength in the labour market, likelihood of higher wages, the level of household debt, and even the estimate of neutral interest rates for the economy.
 
Consumer confidence eases: The weekly ANZ/Roy Morgan consumer confidence rating eased from 113 to 112.5 in the week to July 16. Confidence is down 2.1 per cent over the year.

New vehicle sales: The Bureau of Statistics (ABS) reported that new vehicle sales rose by 1.2 per cent in June – the fourth consecutive gain. Annual sales of SUVs and “other vehicles”, like utes, are at record highs.

The Reserve Bank Board minutes provides guidance on interest rate settings. Consumer confidence data is important for retailers. The residential property price data is important for housing-dependent businesses. The car sales data provide perspectives on consumer spending as well as the auto sector of the sharemarket.

What does it all mean?

The Reserve Bank Board remains cautiously optimistic. In fact it could be argued that the latest minutes were certainly more optimistic than in prior months. Although it is unlikely to result in any change to interest rate setting any time soon. Board members considered all manner of factors at the July meeting with particular focus on the housing and job markets.
Interestingly policymakers judged that the “that the strength of recent labour market data had removed some of the downside risk” to wage growth forecasts. While Reserve Bank liaisons “suggested conditions in the retail sector had improved”. And when it came to the APRA enforced prudential supervision measures it was too early to see the full impact.
 
The commentary on the Australian dollar was rather bland but since the meeting, the Australian dollar has lifted by almost 5 per cent and is now holding closer to US79 cents. It is more likely that policymakers will discuss concerns about the currency in coming months.

The Reserve Bank has provided a bit more colour on the neutral cash rate for the economy – estimating it to be around 3.5 per cent. And if this is the case clearly monetary policy remains very expansionary.

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Reserve Bank Board remains cautiously optimistic: Savanth Sebastian

What do the figures show?

Reserve Bank Board minutes:

Last paragraph: “Members regarded the improvement in the world economy over the preceding months as a welcome development. Nevertheless, they assessed that current economic conditions in Australia, and the outlook for growth and inflation, meant that developments in the labour and housing markets continued to warrant careful monitoring. Taking into account all the available information, the Board judged that holding the accommodative stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.” 

“Members discussed the Bank’s work estimating the neutral real interest rate for Australia. The various estimates suggested that the rate had been broadly stable until around 2007, but had since fallen by around 150 basis points to around 1 per cent. This equated to a neutral nominal cash rate of around 31⁄2 per cent, given that medium-term inflation expectations were well anchored around 21⁄2 per cent, although there is significant uncertainty around this estimate.”
“There had been further signs that investment was increasing and labour markets had tightened further in many advanced economies. This was expected to lead to a pick-up in growth in wages and prices over time.”

“The recent improvement in labour market data had been a positive development. Members noted that the strength of recent labour market data had removed some of the downside risk in the Bank’s forecast of wage growth.”

“Members recognised that it was too early for the prudential supervision measures announced by the Australian Prudential Regulation Authority, which were designed to help address the risks associated with high and rising levels of indebtedness, to have had their full effect.”

“Members noted that the recent pick-up in growth in employment should also support a pick-up in household income growth, and therefore consumption growth, in the period ahead.”

Consumer sentiment

The weekly ANZ/Roy Morgan consumer confidence rating eased from 113 to 112.5 in the week to July 16.

Confidence is down 2.1 per cent over the year and below the average of 113.2 since 2014.

Three of the five components of the index fell in the latest week:

  •  The estimate of family finances compared with a year ago was down from +5 to +3;  The estimate of family finances over the next year was up from +21 to +26;
  •  Economic conditions over the next 12 months was unchanged at -6;
  •  Economic conditions over the next 5 years was down from +4 to +2;
  •  The measure of whether it was a good time to buy a major household item was down from +41 to +38.

New vehicle sales

According to the Australian Bureau of Statistics (ABS), new vehicle sales rose by 1.2 per cent in June – the fourth consecutive gain. Passenger car sales fell by 1.4 per cent but sales of sports utility vehicles rose by 4.4 per cent. And sales of “other” vehicles (includes utilities, panel vans, cab chassis, goods carrying vans, rigid trucks, prime movers, non-freight carrying trucks, and buses) rose by 0.3 per cent.

New vehicle sales are up by 3.6 per cent over the year. Passenger car sales are down by 7.4 per cent, while SUVs sales are up 12.3 per cent and “other vehicles” are up by 10.7 per cent.
 
In rolling annual terms, 1,179,545 new vehicles were sold over the year to June. Sales of SUVs (452,122) hit fresh record highs in annual terms, while annual sales of “other” vehicles also stood at record highs of 258,048. Sales of passenger vehicles fell to a 22-year low to 469,375 in the year to June.

Across states and territories in June: NSW (down 0.1 per cent); Victoria (up 2.6 per cent); Queensland (up 3.1 per cent); South Australia (down 1 per cent); Western Australia (down 0.4 per cent); Tasmania (down 0.4 per cent); Northern Territory (up 7 per cent); ACT (up 6 per cent).

What is the importance of the economic data?

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.

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 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.

What are the implications for interest rates and investors?

CommSec expects the Reserve Bank to remain on the interest rate sidelines for an extended period. 

Savanth Sebastian is an economist for CommSec

Tags: 
Economy

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