Monday, February 24 2014
The Reserve Bank of Australia has noted while weak conditions in the labour market had weighed on consumption growth, the increase in housing and equity prices over the past year had raised the possibility that consumption growth could outpace that of income in the period ahead.
The board members noted in the February minutes that the effects of low interest rates were clearly evident in the housing market, where prices had increased further and turnover had picked up to be just below average.
"These conditions were expected to provide further support to new dwelling activity over the period ahead, and leading indicators of dwelling investment had increased," the minutes noted.
The members also observed that the softness in commercial construction meant that there was labour available to support the strong growth of higher-density dwelling construction.
Growth of housing credit was gradually picking up, particularly so for investors.
The members discussed the staff forecast for the domestic economy, which was a little stronger over the next year or so than at the time of the November Statement on Monetary Policy, in part due to the lower exchange rate.
GDP growth was expected to strengthen a little through 2014, though would be likely to be at a below-trend pace.
Growth was then expected to pick up to an above-trend pace by mid 2016.
But the outlook for the labour market was little changed, as the effect of the softer tone of the recent employment data had been largely offset by the slightly stronger growth outlook.
The inflation forecasts had been revised higher, reflecting a combination of the lower exchange rate and the higher-than-expected December quarter CPI outcome, slightly offset by a softer outlook for wages growth. Underlying inflation was expected to be around 3 per cent over the year to mid 2014 and was then expected to decline towards 2.5 per cent.
Members recognised that conditions in the labour market tended to lag economic growth, and that the labour market had remained weak following the period of below-trend growth in activity.
The minutes noted further signs that the expansionary setting of monetary policy was having the expected effects, with more timely indicators having been more positive for consumption, dwelling investment, business conditions and exports.
"Although inflation in the December quarter had been higher than expected, there were several possible explanations.
"The Board noted that it was likely the inflation reading contained some noise as well as some signal about inflationary pressures, but also presented something of a puzzle in interpreting the mix of activity and price data.
"Also, the further depreciation of the exchange rate since the December meeting was expected to add to inflation for a time, although the outlook for slightly slower wage growth was expected to help keep domestic cost pressures contained over the medium term.
"At recent meetings, the Board had judged that, given the substantial degree of monetary policy stimulus already in place, it was prudent to keep policy unchanged while assessing the continuing impact of that stimulus."
Paul Bloxham, chief economist at HSBC suggests the bottom line was today's minutes reinforced the RBA's shift to a more neutral policy bias and their greater comfort with the current level of the AUD.
"The outlook for the labour market and the degree of persistence of recent strength in inflation will be key factors determining the timing of future rate hikes.
"We see the RBA's easing phase as done and also see it as likely that the RBA may need to lift the cash rate before the end of the year," Paul Bloxham said.