No movement in interest rates yesterday from the Reserve Bank, and there will be no change in this neutral policy stance for some time, even if today’s growth data shows a better than expected rise in March quarter GDP.
And it’s clear that barring some big disaster offshore (such as a crash in iron ore prices in China) that official interest rates will remain at their current 2.50% level for the rest of this year.
The only significant change in this post meeting statement from Governor Glenn Stevens from previous ones this year was to highlight the increasing gap between the value of the dollar and the fall in commodity prices, which has accelerated in the past two months for our most important export in ore ore.
The no rate movement news from the RBA caused the dollar to dip under 92.50 USc, but traders had second thoughts and priced the currency higher at around 92.65 USc.
The rate decision though had no impact on the stockmarket, which after an early rise, took fright at the weaker than expected final report on the health of Chinese manufacturing, and fell.
That was despite the official survey of the Chinese service sector producing another strong reading. The market and investors here ignored that report.
RBA maintains cash rate at record-low 2.5%
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The lack of any action from the RBA shouldn’t have surprised anyone.
In fact, it was another steady as she goes post meeting statement from Mr Stevens, which was virtually unchanged from previous month’s, especially the all important conclusion where he said:
"Looking ahead, continued accommodative monetary policy should provide support to demand, and help growth to strengthen over time. Inflation is expected to be consistent with the 2–3 per cent target over the next two years.
"In the Board’s judgement, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target. On present indications, the most prudent course is likely to be a period of stability in interest rates,” Mr Stevens said.
And there was that significant extra comment on the failure of the dollar to follow our terms of trade lower.
"The earlier decline in the exchange rate is assisting in achieving balanced growth in the economy, but less so than previously as a result of the higher levels over the past few months. The exchange rate remains high by historical standards, particularly given the further decline in commodity prices," Mr Stevens noted.
Earlier this week, the RBA produced its Export Commodity Price Index showing our terms of trade are now back to March 2010 levels in US dollar terms. But in Aussie dollar terms, they are only at 17 month lows, thanks to the dollar’s resilience.
That’s despite weaker iron ore prices – down a third this year – but the Aussie dollar has risen 3%, and at one stage in late May was up more than 4% from January 1.
The current account data yesterday showed a 1.2% fall in our terms of trade in the three months to March.
The terms of trade have dipped further in April and May because of the weakness in iron ore prices.
It could be that the RBA Governor, in an oblique way, is warning that there could be a big fall in the dollar’s value in coming months if the drop in commodity prices continues. The valuation of the currency is looking increasingly stretched.
But in the May statement, Mr Stevens did complain about the dollar being "stubbornly high".
And he did warn that the strong rise in export volumes seen in the first quarter could very well slow in coming months.
But inflation remains under control, with weak wage growth a key moderating factor.
In the rest of yesterday’s statement, Mr Stevens said:
"Growth in the global economy is continuing at a moderate pace, helped by firmer conditions in the advanced countries. China’s growth appears to have slowed a little in early 2014 but remains generally in line with policymakers’ objectives. Commodity prices in historical terms remain high, but some of those important to Australia have continued to decline of late.
"Financial conditions overall remain very accommodative. Long-term interest rates have fallen further and risk spreads remain low. Emerging market economies are once again receiving capital inflows. Volatility in many financial prices is currently unusually low. Markets appear to be attaching a very low probability to any rise in global interest rates over the period ahead.
"In Australia, the economy grew at a below-trend pace in 2013 overall, but growth looks to have been somewhat firmer around the turn of the year. This has resulted partly from very strong increases in resource exports as new capacity has come on stream, but smaller increases in such exports are likely in coming quarters. Moderate growth has been occurring in consumer demand and a strong expansion in housing construction is now under way.
"At the same time, resources sector investment spending is set to decline significantly. Signs of improvement in investment intentions in some other sectors are emerging, but these plans remain tentative, as firms wait for more evidence of improved conditions before committing to significant expansion. Public spending is scheduled to be subdued.
"There has been some improvement in indicators for the labour market in recent months, but it will probably be some time yet before unemployment declines consistently. Recent data confirm that growth in wages has declined noticeably. If these and other domestic costs remain contained, inflation should remain consistent with the target over the next one to two years, even with lower levels of the exchange rate.
"Monetary policy remains accommodative. Interest rates are very low and for some borrowers have edged lower over recent months. Savers continue to look for higher returns in response to low rates on safe instruments. Credit growth has picked up a little. Dwelling prices have increased significantly over the past year, though there have been some signs of a moderation in the pace of increase recently," Mr Stevens said.
Note that Mr Stevens now believes the housing recovery has started with that "strong expansion in housing construction now underway”. A month ago that strong expansion was “foreshadowed".
