For the first time the statement released after yesterday’s board meeting acknowledged the possibility that the global economy might not grow as strongly as expected, saying if did not, Australia’s medium term growth prospects would be in doubt.
The bank revised down its short-term economic growth forecasts. It had forecast growth of 2.5 per cent in the year to June 2011 and 4.25 per cent in the year to December. It now says neither forecast will be met, primarily because of a slower than expected return to production in Queensland’s flood-hit coal mines.
While the slower recovery in coal exports will delay the expected bound in economic growth, the bank believes other developments could subdue it. “Cautious behaviour by households and the high level of the exchange rate are having a noticeable dampening effect,” says the statement released by governor Glenn Stevens.
Inflation - usually the trigger for higher interest rates - should be tame, or “close to target over the next twelve months”. So-called underlying inflation which is adjusted to remove the effect of events such as the Queensland floods is “in the bottom half of the target range, although a gradual increase is expected over time”...
At 2.25 per cent, the most recent measure of underlying inflation is benign. The Bank’s target is a range between 2 and 3 per cent. Inflation would need to jump sharply and soon for the Bank to feel any pressure to raise interest rates during the remaining months of this year.
The changed position reflects neither a disagreement at the board nor a weakening of the bank’s resolve to keep inflation within the target band, merely changed circumstances that have increased the risk of a global slowdown resulting from problems and Europe and put beyond doubt that Australian consumers are having a slowdown of their own, saving rather than spending to force up prices.
“I still think the Reserve has a tightening bias, it's just a question of timing,” said HSBC Australia economist Paul Bloxham. “This has shifted out the timing of the hike,” said the former Reserve Bank staffer.
“The tone is perhaps more conciliatory than ever,” said Credit Suisse economic consultant Sean Keane. “There is little apparent sign of the pressures that had previously occupied the governor’s mind. Its a fair bet that next month the Bank will revise up its forecast of unemployment and revise down its forecast of economic growth.”
Export figures released as the Reserve Bank board met show income from China growing at a breakneck pace with $58 billion earned in the 11 months to May, up from 41 billion in the same period the previous year.
Whereas three years ago Japan eclipsed China as Australia’s biggest customer, last financial year earnings from China exceed those from Japan by 23 per cent. This financial year earnings form China exceeded those from Japan by 37 per cent.
The figures show a slower than expected recovery in coal exports in April and May offset by strong growth in rural exports which climbed 5.7 per cent in April and 6.4 per cent in May.
Our biggest customers
11 months to May
(growth on previous year)
China $58.3 billion (up 42%)
Japan $42.3 billion (up 28%)
Korea $20.4 billion (up 39%)
India $13.9 billion (down 4%)
United States $8.4 billion (down 3%)
Taiwan 8.4 billion (up 40%)
Published in today's SMH and Age
Statement by Glenn Stevens, Governor: Monetary Policy Decision
At its meeting today, the Board decided to leave the cash rate unchanged at 4.75 per cent.
The global economy is continuing its expansion, but the pace of growth slowed in the June quarter. The supply-chain disruptions from the Japanese earthquake and the dampening effects of high commodity prices on income and spending in major countries have both contributed to the slowing. The banking and sovereign debt problems in Europe have also added to uncertainty and volatility in financial markets over recent months.
A key question is whether this more moderate pace of growth will continue. Commodity prices have generally softened of late, though they remain at very high levels. Despite the challenging international environment, the central scenario for the world economy envisaged by most forecasters remains one of growth at, or above, average over the next couple of years. A number of countries have tightened monetary policy but, overall, global financial conditions remain accommodative and underlying rates of inflation have tended to move higher.
Australia's terms of trade are now at very high levels and national income has been growing strongly, though conditions vary significantly across industries. Investment in the resources sector is picking up strongly in response to high levels of commodity prices and the outlook remains very positive. A number of service sectors are also expanding at a solid pace. In other areas, cautious behaviour by households and the high level of the exchange rate are having a noticeable dampening effect. The impetus from earlier Australian Government spending programs is now also abating, as had been intended.
A gradual recovery from the floods and cyclones over the summer is taking place, though the resumption of coal production in flooded mines continues to proceed more slowly than initially expected. The recovery will boost output over the months ahead, and there will also be a mild boost to demand from the broader rebuilding efforts as they get under way, but growth through 2011 is now unlikely to be as strong as earlier forecast. Over the medium term, overall growth is still likely to be at trend or higher, if the world economy grows as expected.
Growth in employment has moderated over recent months and the unemployment rate has been little changed, near 5 per cent. Most leading indicators suggest that this slower pace of employment growth is likely to continue in the near term. Reports of skills shortages remain confined, at this point, to the resources and related sectors. After the significant decline in 2009, growth in wages has returned to rates seen prior to the downturn.
Credit growth remains modest. Signs have continued to emerge of some greater willingness to lend and business credit has expanded this year after a period of contraction. Growth in credit to households, on the other hand, has slowed. Most asset prices, including housing prices, have also softened over recent months.
Year-ended CPI inflation is likely to remain elevated in the near term due to the extreme weather events earlier in the year. However, as the temporary price shocks dissipate, CPI inflation is expected to be close to target over the next 12 months. In underlying terms, inflation has been in the bottom half of the target range, though a gradual increase is expected over time.
At today's meeting, the Board judged that the current mildly restrictive stance of monetary policy remained appropriate. In future meetings, the Board will continue to assess carefully the evolving outlook for growth and inflation.
. Memo RBA: Spending's shrinking
. A gentler, more understanding RBA
. Reserve poised, however gentle its language