Tuesday, September 15, 2015

Itching to do nothing. The Reserve Bank board wants to wait

If the Reserve Bank board wanted to, it could cut interest rates right now.

The minutes of its September board meeting, released on Tuesday, show wage growth low, growth in the consumer price index low, and "spare capacity" in the economy, meaning any boost to the economy from a cut in rates is unlikely to spark too much inflation.

However, it's sort of hoping that it doesn't need to do so.

Against a generally worsening international backdrop, sections of the Australia's economy are picking up.

Surveyed business conditions have been improving for months. They are above average for both the household and business service sectors. These sectors are important because they are highly likely to employ people.

They also either don't do much investing or aren't properly counted in the official investment survey, meaning their effect on jobs is greater than official figures suggest.

Manufacturing firms are also doing better, largely because of the lower dollar. The dollar may well have further to fall and it'll take a while away before the benefits of the slide to date become apparent, meaning the bank sees Australian firms continuing to grab business from foreign firms both domestically and abroad.

While non-mining firms are planning to cut their investment in the year ahead (as mining firms slash it), the good news is that they are not planning to cut it as much as they were.

Both job vacancies and the official employment survey show the labour market improving. The employment-to-population ratio has been climbing since October...

The RBA is not that concerned by the very weak economic growth figures reported the day after it met, believing that the growth rate of 0.2 per cent in the June quarter partly reflected temporary disruptions to resource exports, and partly some sort of statistical payback for the very strong growth reported in the March quarter.

It is acutely aware that the "green shoots" it is seeing could head back down at any moment.

If they do, it is ready to cut rates. However, it wants to wait until it is sure, or wait until it is sure that the green shoots are growing.

It'll have a better idea at its November board meeting. The Melbourne Cup Day meeting is often used to adjust rates because it falls as the board updates its quarterly forecasts and just after the quarterly inflation and investment figures.

It is conscious, too, that further cuts to an already low interest rate are unlikely to much boost investment, and may fuel the Sydney and Melbourne house price booms.

And it would love the Turnbull government to take things into its own hands and boost the economy in other ways if necessary.

It would like to sit on its hands.

In The Age and Sydney Morning Herald