Australian interest rates June 2015

The RBA held rates in June ...

As expected, the Reserve Bank Board decided to leave the cash rate unchanged at 2% following its June meeting. Of most interest was the choice of words in the concluding paragraph of the Governor’s statement with speculation that the Board might adopt a more explicit easing bias than had been implied in the May meeting minutes. Recall that in those minutes the Board indicated: “Members did not see [actions] as limiting the Board’s scope for any action that might be appropriate at future meetings”. In the event, the Board chose a moderation of that theme with the comment that: “information on economic and financial conditions to be received over the period ahead will inform the Board’s assessment of the outlook and hence whether the current stance of policy will most effectively foster sustainable growth and inflation consistent with the target”.

... whilst retaining a ‘soft easing bias’ ...

From our perspective both this and the May meeting minutes convey a similar intent. That is, that the Board sees itself as having flexibility to further cut rates if the circumstances require but is making no explicit commitment in that direction. Given the inflation forecast from the May Statement on Monetary Policy – which has the Bank forecasting underlying inflation to be in the bottom half of the 2-3% range in 2016 – we therefore continue to assess the current stance as “a soft easing bias”.

The Bank is apparently unperturbed ...

Markets were also speculating as to whether the language around business investment would be much strengthened relative to May following the very weak spending intentions in the Q1 Capex survey. In the event, the change was only subtle. In May the outlook was described as: “a key drag on private demand is likely to be weakness in business capital expenditure in both mining and non-mining sectors over the coming year”. That has been replaced with: “a key drag on private demand is weakness in business capital expenditure in both the mining and non-mining sectors and this is likely to persist over the coming year”.

... by the very weak Q1 Capex survey.

There was little else of real interest in the June Governor’s statement.

The Q1 national accounts though ...

One of the key pieces of ‘information over the period ahead’ the RBA Governor would have been looking to is the March quarter national accounts released the day after the RBA meeting. While there were positives in the accounts – the 0.9%qtr gain in GDP came in above expectations and both the housing sector and exports were bright spots – most of the detail would have concerned the Bank.

... may have been more unsettling ...

The Reserve Bank will have been unsettled by the update on consumers. In recent statements, the Bank has shown some optimism around household expenditure, citing: “improved trends in household demand”. The March quarter national accounts directly challenge that view with consumer spending up only 0.5% in the quarter and the December quarter gain marked down from 0.9% to 0.8%. Whereas the six-month annualised growth rate was running at a promising 3% pace, the new figures show momentum stuck at a 2.6% pace since mid last year. The “improving trend” is now barely a pick-up at all with growth still well below the long run average 3-3.5% pace.

... with the consumer detail in particular ...

Adding to this is the picture of an ongoing intense squeeze on incomes and reliance on reduced savings to ‘fund’ what spending growth there is. Household disposable incomes barely rose in the March quarter (+0.1% and 1.3%yr) with all of the gain in spending ‘funded’ by a reduction in the proportion of income put towards savings. The household savings rate declined from 8.8% in Q4 to 8.3% in Q1 and is now down from 9.6% a year ago. This fall can only be interpreted as an involuntary adjustment rather than a positive sign that households are feeling more confident about their finances. That in turn means the effect is likely to reverse if there is a recovery in income growth, limiting any associated uplift in spending.

... not in line with their rhetoric.

We have argued previously that “any slippage in household expenditure growth which would dampen prospects for a recovery in non-mining investment would affect growth forecasts for 2016 and substantially increase the risk of lower rates”. As such, both the weaker consumer picture from the Q1 national accounts and the disappointing read on Capex plans may well cause the Bank to reassess its optimistic view on household expenditure and prospects for an eventual upturn in non-mining investment.

The Bank will need to see more data ...

However, on balance we expect the Bank to await further data before making any moves on policy. This week’s figures on expenditure will be disappointing for the Bank but they stop short of the sort of sudden slowing that would require the Bank to make substantial revisions to the growth outlook. There were some hopeful signs of a Q2 ‘policy boost’ with consumer sentiment responding positively to the May rate cut and Federal Budget, but this retraced violently in June. The Bank will want to see where this ultimately settles.

... before making any policy reassessment.

Accordingly the nearest date for a potential policy move is likely to be November, by which time the Bank will have sufficient information to assess trends in household expenditure and employment through Q2 and Q3. Our call has been and remains that rates will remain on hold throughout 2015 and 2016. However ‘soft easing bias’ will clearly be maintained near term and policy could come back into play if the Q2 and Q3 data flow disappoints.

Bill Evans, Chief Economist

Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.

Reproduced from the June 2015 edition of Westpac's Market Insights

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