RBA notes dwelling investment muted recovery relative to past cyclical upturns

The RBA's latest minutes noted conditions in the housing sector had continued to improve.

But noted that dwelling investment had "thus far" been in a muted recovery relative to past cyclical upturns.

"Auction clearance rates remained high and dwelling prices had increased further in recent months," the minutes noted.

"A number of indicators were pointing to a further recovery in dwelling investment, consistent with the low level of interest rates.

"Residential building approvals, especially for detached housing, had increased in the June quarter and loan approvals were at their highest level in over three years.

"Members did, nevertheless, note that dwelling investment had thus far experienced a muted recovery relative to past cyclical upturns," the minutes noted.

The staff's inflation forecast incorporated the offsetting influences of a slightly weaker outlook for the labour market (and the economy more generally) and the significant depreciation of the exchange rate, with the latter expected to boost prices of tradable items gradually over the next few years.

"In the near term, these effects were expected roughly to offset one another.

"In year-ended terms, underlying inflation was expected to remain close to the lower end of the inflation target range this year, before picking up to around the middle of the target in the first half of 2014 and staying close to that rate thereafter."

In conclusion it noted recent information suggested that the economy was growing at a below trend pace. Indicators of consumer spending had been soft.

"Borrowing for housing had picked up, as had dwelling prices, and there had been an increase in leading indicators of dwelling construction, but to date this had been moderate rather than strong.

"Employment growth was continuing, but at a pace below the rate of growth of the labour force, and unemployment had tended to rise. Inflation remained low and, allowing for the effects of the introduction of the carbon price, was around the bottom of the target range. Wages growth was slowing.

"The revised staff forecasts were for below trend output growth over the coming year or so, before growth was expected to pick up partly because of the effects of the recent exchange rate depreciation.

"The path of business investment spending would be affected by the turning of the cycle in resources investment, where indicators continued to suggest that a decline was likely over the next several years.

"Near-term prospects for business investment outside the resources sector remained subdued, with quite weak levels of confidence across many segments of business.

"In due course, inflation would be pushed up for a period by the lower exchange rate, but even so was forecast to be around the middle of the target range."

The RBA members noted that there had already been a substantial easing of monetary policy over the previous 18 months.

"At recent meetings the Board had held the cash rate steady, but had judged that the inflation outlook might afford some scope to ease policy further, should that be necessary to support demand.

"The forecasts for this meeting suggested no lessening of that scope, but did show a weaker outlook for activity overall.

"The course of the exchange rate would be important. It had declined since the previous meeting, though remained high by historical standards. It was possible the exchange rate would decline further over time, which would assist in rebalancing growth in the economy, though it would also be affected by developments in other countries.

"On balance, with growth expected to remain below trend for longer and inflation to remain within the target even with the effects of a lower exchange rate, members concluded that a lower level of the cash rate would better contribute to achieving sustainable growth in demand consistent with the inflation target.

"Regarding the communication of this decision, members agreed that the Bank should neither close off the possibility of reducing rates further, nor signal an imminent intention to reduce rates further. The Board would continue to examine the data over the months ahead to judge whether monetary policy was appropriately configured."