RBA Minutes May 2015 (edited) - extended version

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

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International Economic Conditions

Members noted that growth of Australia's major partners had eased a little in the early months of 2015, but was forecast to remain close to its long-run average in 2015 and 2016. Minor revisions to the outlook largely reflected weaker in China in the March quarter, which had also been reflected in lower bulk prices and hence a slightly lower of trade than previously forecast by staff. Monetary conditions remained very a across the globe and low prices were also supporting growth of Australia's trading partners. Core rates were below central banks' targets in many economies...

Domestic Economic Conditions

Members observed that the forces underpinning developments in the domestic were much as they had been for some time. The available data suggested that growth in the domestic economy had continued at a pace a bit below in the March quarter. Members noted that growth was expected to continue at a similar pace over the coming year before picking up gradually to an above-average pace over the course of 2016/17.

Household consumption growth had picked up late in 2014 and recent indicators were consistent with expectations that would continue to rise gradually, supported by very low rates, relatively strong pn growth and a gradual decline in the ratio. Members noted that if households respond to very low interest rates and higher a prices to a similar degree as they had in the period prior to the global crisis, expected outcomes would include a lower saving ratio and higher consumption growth than embodied in the forecasts. Alternatively, if households were less inclined to bring forward their consumption than had been factored into the forecasts, perhaps to limit the increase in their le, consumption growth would be likely to be weaker and the saving ratio higher than forecast.

Conditions in the established market had remained strong in Sydney and Melbourne. However, across the rest of the country, which accounts for around 60 per cent of Australia's dwelling stock, housing growth had declined. The available data suggested that dwelling i had grown strongly in the March quarter, supported by low interest rates and above-average population growth. Forward-looking indicators, including residential building and approvals, suggested that dwelling investment would continue to grow strongly in the next few quarters. Members noted that growth of housing credit for both owner-occupiers and is had remained relatively stable in recent months, with overall c growth broadly in line with longer-term income growth.

Survey data had suggested that business conditions in the non- sector were around average and that business credit had picked up of late. However, forward-looking measures of business e had remained a little below average and non-residential building approvals had also been running at a relatively low level. Members noted that non-mining business t was expected to recover later than had been thought at the time the forecasts for the February Statement on Monetary Policy had been prepared... Members noted that rate developments were also likely to remain important for investment decisions. Uncertainty about both the timing and speed of the recovery in non-mining business investment remained key risks to the forecasts. investment was still expected to decline sharply, but the speed of that decline continued to be uncertain...Fiscal by the federal and state governments was expected to contribute to subdued growth of domestic over the forecast period...

The most recent labour force data indicated that growth had been increasing over the past six months or more, to be a little above the rate of n growth. Members noted that the revised labour force data also indicated that the rate had been stable through most of this period at about 6¼ per cent, and observed that the extended period of slow growth may help to reconcile these data with the below-trend growth in the over 2014. Forward-looking indicators of demand had continued to point to modest growth of employment over coming months.

Members noted that the delayed pick-up in growth in the revised outlook meant that the unemployment was forecast to rise further, before starting to decline gradually towards the end of the forecast period. Wage was not expected to increase from current low levels for some time. Members discussed the possibility that employment growth could grow fast enough such that the did not increase, especially if there was ongoing moderation in wage growth.

in the March quarter had been broadly as expected. CPI inflation had slowed over the past year, reflecting the large falls in f prices and repeal of the . inflation had remained around ½–¾ per cent in the quarter and 2¼–2½ per cent over the past year. Domestic pressures – as indicated by non- inflation – had remained below average, consistent with the extended period of slower . Inflation in consumer prices related to housing was marginally above its historical average, driven by inflation in new d costs reflecting the strength of the housing . Tradables inflation (excluding items and tobacco) had picked up in response to the of the Australian over the past year or so... Domestic labour cost pressures were expected to remain well contained and underlying inflation was expected to remain consistent with the inflation over the forecast period. inflation was forecast to remain below 2 per cent in year-ended terms through to mid 2015, before picking up to be consistent with the inflation target thereafter.

Financial Markets

... Members observed that financial markets continued to focus on the situation in G and monetary policy developments in the major economies. Negotiations between the Greek Government and its official sector cs remained at an impasse. Greece appeared to have sufficient funds to meet its scheduled payments in May only after the introduction of further stopgap measures. The next Eurogroup meeting was scheduled for 11 May and at least partial agreement would be needed on Greece's rm agenda before further assistance funds were released. Overall, Greek banks' reliance on emergency ly assistance had increased significantly recently and total Eurosystem lending to Greek banks now exceeded one-quarter of their total liabilities... The appreciation of the US dollar since mid 2014 had continued its modest reversal over the past month, resulting in a of the US dollar against most currencies. Reflecting that, together with recent domestic data, the Australian dollar had by 3 per cent against the US dollar and by 2½ per cent on a trade- basis over the past month. Nevertheless, compared with its level in mid 2014, the Australian dollar remained around 17 per cent lower against the US dollar and around 10 per cent lower on a trade-weighted basis.

... Members noted that ey prices in the major developed economy markets had risen during April, with the exception of Europe, where equity prices fell a little after large rises earlier in the year. In Australia, equity prices also recorded a small decline in April, although the r sector had outperformed, with ey sector share prices rising following an increase in the price...

Considerations for Monetary Policy

Members assessed that the outlook for global growth had been revised only marginally lower in the near term and would continue to be supported by stimulatory policies and the low price of . They noted that growth appeared to have slowed in China and that the weakness in the Chinese market continued to represent a significant risk both for Chinese growth and demand for construction-related cs. Lower growth in the demand for commodities had contributed to the lower prices of Australia's key commodity since the beginning of the year. As a result, Australia's of were expected to decline a little more than was forecast three months ago.

In their discussion of the appropriate course for monetary , members noted the revised staff forecasts for the domestic . Although the recent flow of data had been generally positive, there had also been indications that future c spending in both the mining and non-mining sectors would be weaker than expected. Overall, compared with the previous set of forecasts, was now expected to take longer to strengthen and the was likely to remain elevated for longer. This change, and generally subdued growth of domestic costs, including , implied that inflation was expected to be slightly lower than in earlier forecasts though still consistent with the . On the face of it, this meant that it would be appropriate to consider an of monetary policy.

Members also discussed the potential risk that low levels of could foster imbalances in the housing market. While concerned about the very strong pace of growth of housing prices in , and observing that conditions in Melbourne were strong, members saw much more muted trends in other capital cities. As at previous meetings, they acknowledged the risks that could accompany a sustained increase in le from already high levels, should that occur, and that the effects of lower interest rates could be less than in the past. On the data available for this meeting, however, it did not appear that the growth of housing credit, either for or owner-occupancy purposes, had been increasing over recent months. The Bank would continue to work with other regulators to assess and contain the risks arising from the .

More broadly, members noted that the low levels of interest rates were helping to support in the face of a number of persistent headwinds and that a further reduction in the would provide some additional support to economic activity by reinforcing recent encouraging trends in household demand. In turn, this would support non-mining investment insofar as demand conditions were the main factor constraining these decisions. Such outcomes would be expected ultimately to lead to stronger l m conditions. Members also noted that further depreciation of the e seemed to be both likely and necessary, particularly given the significant declines in key prices, and that such an outcome would help to achieve more bd growth in the economy and assist with the transition to a lower .

Members discussed the timing of any interest rate adjustment. They could see cases both for moving at this meeting or at the subsequent meeting. The latter course would bring the advantage of additional information on the economy, including details of the forthcoming Commonwealth . On the other hand, with the revised staff forecasts scheduled to be released a few days after the meeting, members acknowledged that the challenges of communication might be more effectively met with a in the cash rate at this meeting.

On balance, taking all these factors into account, the Board decided that the best course was to ease further at this meeting. Members agreed that, as at the time of the reduction in the cash rate in February, the statement communicating the decision would not contain any guidance on the future path of monetary policy. Members did not see this as limiting the Board's scope for any action that might be appropriate at future meetings.

The Decision

The Board decided to lower the cash rate by 25 to 2.0 per cent, effective 6 May.