RBA Minutes March 2015 (edited)

Fill the gaps in this heavily edited version of the RBA Minutes of its March 2015 Board Meeting. A good exercise to familiarise yourself with the forces impacting on the economy in March 2015

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International Economic Conditions

Members commenced their discussion of international economic conditions by observing that growth of Australia's major partners had been around its long-run average in 2014 and that recent indicators suggested a continuation of this pace into 2015. Although prices had increased a little over the past month, consistent with signs that supply from some higher-cost sources could grow less rapidly over the period ahead, prices had remained at relatively low levels. Members noted that low oil prices should boost global , with the effect largest in economies that most of their oil, such as the euro area and Japan. Lower oil prices had also led to lower headline and members observed that c inflation, which abstracts from the direct effects of changes in energy prices, was also low in many economies... .

Domestic Economic Conditions

Members noted that a range of indicators suggested that Australian GDP continued at a below-trend pace in the December quarter and over the course of 2014. These indicators had suggested that growth of , dwelling investment and public demand were likely to have increased, but that business investment was likely to have fallen further, largely reflecting further steep declines in m investment. Growth of retail sales volumes had picked up to an above-average pace in the December quarter and liaison suggested that the value of retail sales had increased in January. Real household incomes had been buoyed by the recent decline in oil and measures of sentiment were around average levels. However, income growth had remained low by historical standards, which was likely to dampen future consumption growth.

There had been further broad-based evidence of spare in the labour market. The rate had continued its gradual upward trend of the past few years and average hours worked had remained subdued. Nevertheless, members noted that employment growth had picked up over the past year. Members also observed that growth outcomes had been low in the December quarter, consistent with ongoing spare capacity in the labour market and pressures on employers to contain ... .
Members discussed the extent to which accommodative policy and ongoing strength in h market activity would support consumption growth in the near term. They noted that the interest payments made by borrowers are significantly larger than the income received by holders of interest-bearing assets and, as a result, the very low level of interest rates was acting, other things equal, to support aggregate d income available for consumption. Members noted that the net effect on consumption through this transmission channel was a function of a number of factors, including the distribution of loans and interest-bearing assets across households and the extent to which the consumption behaviour of different households responds to low interest rates.

The current strength of housing construction and the increase in housing were expected to provide a measure of support for consumption... . A range of indicators, including residential building approvals, suggested further strong growth of dwelling in the near term... . Members noted that recent data on capital expenditure and non-residential work done had been consistent with earlier expectations that business investment would decline in the December quarter, largely owing to lower investment. The ABS survey of capital expenditure intentions implied further large falls in mining investment, as current projects were completed and few new projects were likely to proceed. The survey implied that non-mining investment would remain subdued for some time yet and for longer than had been previously expected... . Overall, survey measures of business conditions had remained around their average levels, while the trend in non-residential building approvals was at a low level and conditions in the commercial property market remained weak, with office vacancy rates in all capital cities at high levels. Available data suggested that export volumes rose slightly in the December quarter, as increases in non-bulk commodity exports offset declines in coal, service and rural exports. Exports of iron ore volumes were estimated to be little changed.

Financial Markets

Members observed that global financial markets continued to focus on developments in G over the past month, particularly the negotiations between the new Greek Government and its c ahead of the expiry of Greece's financial assistance program at the end of February. Although Greece had reached an agreement to negotiate a four-month extension of its program, any extension was contingent on the proposed structural reforms being viewed as sufficiently comprehensive by each of the European Commission, the ECB and the International Monetary Fund. Sizeable deposit outflows from Greek banks in recent months and a lack of access to private wholesale funding had significantly increased their dependence on ECB funding. Members noted that these developments had led to little contagion to other European countries to date, in contrast to the situation in the 2010 to 2012 period.

Market expectations for increases in the US federal funds rate had been brought forward over February, following better-than-expected employment data. It remained the case, however, that the market's implied future tightening of monetary was considerably more drawn out than the expectations of members of the Federal Open Market Committee, as published in December 2014... . Members noted that equity prices [e.g. prices] in advanced economies had increased by 5 per cent over February, while those in emerging markets had increased by a little less. Notably, Australian equity prices had risen by more than 5 per cent over the past month, and by 10 per cent over the year to date, with corporate earnings announcements having generally been in line with, or a little better than, analysts' e.

There had been little change in exchange rates over February, including for the dollar. An increase in net private capital outflows from China had resulted in net sales of Chinese foreign exchange reserves in recent months, with the renminbi at the bottom of its trading band against the US dollar.

Australian lenders had passed on the reduction in the rate in February to housing and business b rates. Most banks had also adjusted their deposit rates lower by 25 basis points, which had followed reductions in term deposit and bonus saver deposit rates of around 15 basis points in January.

Members concluded their discussion with the observation that financial markets were expecting another reduction in the cash rate target by May, with around a 50 per cent probability of the reduction occurring at the present meeting... .

Considerations for Monetary Policy

In assessing the appropriate stance for monetary policy in Australia, members noted that the outlook for global growth had not changed, with Australia's major trading partners forecast to grow by around the average of recent years in 2015. Lower oil prices were expected to boost growth in major trading partners and reduce temporarily. More generally, although the decline in many prices over the past year had largely been in response to expansions in global , members observed that demand-side factors, including the weakness in Chinese property markets, had also played a role. Although the Australian dollar had d, particularly against the US dollar, it remained above most estimates of its f value, particularly given the significant declines in key commodity prices. Conditions in global financial markets remained very accommodative. Changes to the se of monetary policy by the major central banks were likely to be important influences on financial markets over the coming year.

Data available at the time of the meeting suggested that the Australian economy had continued to grow at a below-trend pace in the December quarter and that domestic demand growth had remained weak overall. There had been some evidence suggesting that growth of dwelling and consumption had picked up in the December quarter, but there had also been indications that business investment could remain subdued for longer than had been previously expected. On balance, the evidence suggested that labour conditions were likely to remain subdued and the economy would continue to operate with a degree of spare capacity for some time. As a result, pressures were expected to remain contained and inflation was forecast to remain consistent with the target over the next year or so, even with a lower e rate.

At the same time, activity in the market had remained strong. Housing prices had continued to increase strongly in Sydney and at a solid pace in Melbourne. In other capital cities, trends had been more mixed and annual increases in capital city housing prices (excluding Sydney and Melbourne) had averaged about 3 per cent. Growth of dwelling was estimated to have picked up in the December quarter and was expected to remain at a high level in the near term. While credit had continued to grow a little faster than incomes, household l had not increased significantly and the Bank would continue to work with other regulators to assess and contain risks that might arise from the housing market.

Members noted that the current setting of monetary policy had been a for some time and that the recent reduction in the cash rate would provide some further support to the . They also acknowledged that a lower rate would help achieve balanced growth in the economy. Nonetheless, on the basis of the current forecasts for growth and , members were of the view that a case to ease policy further might emerge.

In considering whether or not to reduce the cash further at this meeting, members saw benefit in allowing some time for the structure of rates and the economy to adjust to the earlier change. They also saw advantages in receiving more data to indicate whether or not the economy was on the previously forecast path. Further, they noted the greater degree of uncertainty about the behaviour of borrowers and s in a world of very low interest rates. Taking account of all these factors, members judged it appropriate to hold the cash rate steady for the time being, while recognising that further easing over the period ahead may be appropriate to foster sustainable growth in while maintaining inflation consistent with the target.

The Decision

The Board decided to leave the cash rate unchanged at per cent.