Reserve Bank content with rate settings: CommSec's Craig James
GUEST OBSERVER
No surprises from the Reserve Bank Governor. Some may be a bit surprised at Governor Stevens’ upbeat tone but he always has been a ‘glass half-full’ than ‘glass half-empty’ Governor.
It is clear that interest rate settings are solidly on hold, especially given that the Governor is more comfortable with the level of the Aussie dollar.
What does the testimony reveal?
Terms of trade
“They are now back to about the same level as in 2006 – still about 30 per cent above their 20th century average level.”
Economic conditions
“Outside the mining sector and parts of the economy most directly exposed to it, there are signs that conditions have been very gradually improving.”
“Over the year to June, real GDP grew by 2%. This was in line with our forecast of three months ago and at the lower end of our forecast range from a year ago.”
“... what is pretty clear is that the economy is growing, albeit not as fast as we would like, the adjustment to the decline in the terms of trade is well advanced, and non-mining activity is improving rather than deteriorating. If the latter trend continues, it is credible to think that we can achieve better output growth, particularly as we reach the later phases of the decline in mining investment. This is what is needed to bring down the unemployment rate.”
“There is still a pretty good chance that we will come out of this episode (resources boom) fairly well, and much better than we came out of previous episodes of this type.”
Job market
“The rate of unemployment, though variable from month to month, seems to have stopped rising, and it is at a level a bit lower than we had thought, six months ago, it might reach.”
Lower Aussie dollar
“More recently, the significant decline in the exchange rate is starting to have more discernible effects on the pattern of spending and production.”
“We are hearing about the effects of this in our liaison and also seeing it in the data on such things as tourism flows as well as exports of business services.”
Job market
“The rate of unemployment, though variable from month to month, seems to have stopped rising, and it is at a level a bit lower than we had thought, six months ago, it might reach.”
US interest rates
“Some fretting about the first increase in US interest rates for nine years is to be expected, no matter how well telegraphed it has been. The more important factor, though, will be the pace of subsequent increases. The Federal Reserve has indicated this is expected to be very gradual, but of course that will depend on what happens with the US economy.”
Questions & answers
Potential US interest rate hike
“The most anticipated or fretted about change in the history of the world”
“It is a good sign” that the Federal Reserve is debating a lift in interest rates.
Australian interest rates
“We are pretty content with where we are right now"
Investor housing lending
“It is about containing leverage”
Reserve Bank Governor notes that impact of APRA/ASIC changes for investor housing lending so far “is quite positive”
Business & consumer confidence
“I take issue (with comments) that consumer & business confidence are low" They are "pretty close to average" Employment
“Getting pretty good growth in employment"
Lower than “trend” economic growth
In the past “trend” economic growth was a bit over 3 – “3 point something”. Growth has been a bit lower for some time but unemployment stable and the Reserve Bank is working through the apparent discrepancy.
Economic pessimism
RBA Governor on economic debate "we have a tendency to be more negative that the facts warrant” Aussie dollar
“Aussie dollar is “finding its own level”; it is “doing its job”
Affordability of housing
Question from student on the cost of buying first home. Stevens noted that first time entry into the housing market has always been daunting and it was for him. But Stevens noted that the answer to greater access to the housing market must come through supply side – greater supply of land and appropriately configured transport. He notes that there would be something wrong in Australia given our large land mass if we can’t increase the supply of residential land at a lower marginal cost.
What is the importance of the economic data?
The Reserve Bank Governor testifies to the House of Representatives Economics Committee twice a year.
What are the implications for interest rates and investors?
Interest rates are on hold. CommSec expects unchanged interest rate settings over the coming year.
The Reserve Bank Governor is sticking with the view that growth will pick up over the next few years although it was “picking up more slowly than I would like.”
Craig James is the chief economist at CommSec.