Friday 15 March 2013 by FIIG Research Legacy

RBA Minutes, Testimony, and Debelle – guidance towards an easing bias

This note provides a summary and comments on the following three main releases: (i) Minutes, (ii) a recent Testimony from the Governor, and (iii) a speech by Guy Debelle below

RBA minutes

RBA guidance on monetary policy continued with the Minutes of the recent meeting of 5 February (released on 19 February), being consistent with the recent Statement of Monetary Policy (released on 8 February). Here, the RBA painted a picture of an economy that needed additional help, so as to transition from mining to non-mining led growth.

Minutes: Global assessment

Overall, the assessment of global growth was more upbeat over the recent months, as regional and Chinese growth has stabilised. As the RBA note,

A wide range of indicators showed that growth in the Chinese economy had stabilised, underpinned by public spending and somewhat stimulatory financial policies, which had boosted investment in infrastructure and housing. This had provided some additional support for demand for commodities and also for activity in east Asia (excluding Japan), where growth had remained a little below the average of the past decade. There had also been indications of stronger growth of domestic demand in the region. Members noted that activity in Japan remained weak, although the new government had announced plans to stimulate domestic economic activity and combat deflation.

While growth in the US had improved modestly, the opposite occurred in the Euro area, while commodity prices remained subdued, as the RBA noted,

The Euro area economy looked weaker and was estimated to have contracted again in the December quarter, notwithstanding a slight improvement in economic conditions and sentiment late in the quarter. Earlier policy announcements had contributed to a period of financial market stability, but the structural problems facing a number of countries were significant and would take time to resolve.

Minutes: Domestic assessment

Generally, the RBA indicated it expected growth would remain a little below trend, as the non-mining sector was expected to not provide enough strength to offset the peak in the mining sector. Moreover, the high AUD weighed on non-mining growth, as the RBA indicated,

Members were briefed on the updated staff forecasts. GDP growth was expected to be a bit below trend at around 2½ per cent over 2013 before picking up a little over the course of 2014. The forecasts had been revised down slightly, largely reflecting information that accumulated late last year suggesting a softer outlook for mining and non-mining investment. The forecast for growth over the next year or so incorporated several factors, notably the likelihood that the mining investment boom would reach its peak, the effect of both fiscal consolidation and the persistently high level of the Australian dollar, and few indications of an impending pick-up in non-mining business investment at this stage. At the same time, improving conditions in the housing market were expected to continue to provide support to dwelling investment, while non-mining business investment was expected to pick up gradually over time.

Combined with the fairly soft outlook for domestic growth, the inflation outlook was very much contained, as the RBA indicated

The near-term outlook for inflation was a little lower than previously, reflecting the lower starting point implied by the December quarter CPI data and the softer outlook for activity and employment. In year-ended terms, the rate of underlying inflation was expected to be around 2½ per cent over the coming few quarters and then remain around the middle of the target for the rest of the forecast period. This was predicated on a further gradual slowing in the growth rate of wages combined with a higher rate of productivity growth compared with the slow pace seen over the 2000s.

Minutes: Financial markets

Supporting and sustaining the amelioration in global growth was a continued improvement in financial market conditions, where the cost of equity funding fell with increased equity prices, and where the cost of debt funding decreased with credit spread contraction. Also, the Japanese growth policies had led to improvements in growth prospects for Japan. While the Japanese indicated concerns about the strength of their currency, the same was emphasised by the RBA, as the high AUD weighed on non-mining growth. As the RBA noted,

The Japanese election and statements by Japanese politicians had contributed to a significant depreciation of the yen since mid November. With the yen depreciating sharply, officials from an increasing number of countries had expressed concerns about the strength of their currencies. The Australian dollar had appreciated by 13 per cent against the yen since mid November, but there had been little change on a trade-weighted basis and against the US dollar. Members observed that the Australian dollar remained at a high level by historical standards.

Minutes: Considerations for monetary policy

Generally, the RBA indicated the global growth forecast had improved, although significant risks still remained. Domestic growth forecasts had been lowered as a result of the moderation in the demand for labour especially in the non-mining sector, suggesting that wages growth would remain contained, going forward. While a higher CPI reading constrained the RBA in November, the RBA indicated that this constraint had been lifted, and that an easing remains on the agenda, as they indicated in the following,

In response to the weakening in the outlook for economic activity domestically, and with inflation remaining contained, the Board had reduced the cash rate by 175 basis points since late in 2011, including by 50 basis points in the last quarter of 2012. Interest rate sensitive parts of the economy had shown some signs of responding to these lower rates, which were well below their longer-run averages, and further effects could be expected over time. At the same time, the exchange rate remained high despite the terms of trade having declined significantly since peaking about 18 months earlier. The inflation outlook, as assessed at this meeting, would afford scope to ease policy further, should that be necessary to support demand. Noting that monetary policy was already accommodative as a result of the substantial easing of policy over the past 15 months, and that this stimulus was continuing to work its way through the economy, the Board judged that it was prudent to leave the cash rate unchanged at this meeting.


RBA releases continued with the testimony of RBA Governor Stevens, to the House of Representatives, in the Opening Statement to House of Representatives Standing Committee on Economics, in Canberra, dated 22 February 2013. Here, the Governor reiterated the messages that were delivered in the Minutes, as listed above, and the Statement of Monetary Policy. Sub-trend growth was expected through 2013, with the possibility of strengthening growth in 2014 and beyond. Focus on the transition, from mining led growth, to non-mining led growth, was again the central problem for the RBA, as the Governor indicated,

Stepping back from the numbers, in broad terms, the economy will be adjusting to the peak of the mining boom and some other areas of demand will have room to grow more quickly than they have in recent years. This transition will not necessarily be seamless – these things seldom are – but there are reasonable prospects of it occurring over time. As we go through this period, the pressures to adapt business models, contain costs, increase productivity and innovate will remain. But such adjustments are actually positive for longer-run economic performance.

Debelle Speech and Auction clearance

Guy Debelle, Assistant governor (Financial Markets) in a speech entitled, “The Reserve Bank's Operations in Financial Markets”, which was an addressed to the University of Adelaide Business School, dated - 26 February 2013, indicated that Australian bank funding costs, along with other developments, had impacted the transmission of monetary policy in the last few years,

So the cash rate has a large influence on lending rates. But there are other factors such as credit risk premia, competitive pressures in the deposit market, as well as changes in the mix of funding banks use which mean that the relationship between the cash rate and lending rates may not always be one for one. In the years before 2007, these other factors did not move around much, so changes in lending rates did tend to move in line with the cash rate. But over the past five years, there has been quite a material change in a number of these factors, so that while changes in the cash rate are still the predominant determinant of changes in lending rates, the relationship between them is not one for one.

Debelle also indicated that there is some scope to reduce rates further, so as to “counterbalance” the impact of an over-valued Australian currency, as Debelle indicated,

To date in Australia, we have been able to counter the effects of the higher Australian dollar with lower interest rates, as my colleague Phil Lowe described recently. We still obviously retain scope to lower interest rates further, should the need arise, including to counterbalance the pressures of an elevated exchange rate.

However, easing policy too much can cause issues elsewhere in the economy, as has been seen in Canada, Hong Kong, and Switzerland, as Debelle pointed out. Hence, while scope to ease remains, the RBA will remain very careful about easing too much, and recent elevations in the auction clearance rate would be of some concern to the RBA, as it may mean that the residential property market may be following the dizzy heights of the equity market into investment nirvana.

Specifically, auction clearance in Melbourne, according to most recent information from the Real Estate Institute of Victoria show Melbourne had a very large auction volume with a 73% clearance rate, for last weekend. This is an improvement on the prior weekend, and a large increase on the 57% recorded at the same time last year. In Sydney, the story was similar, with clearance rates of around 76% in the results for last weekend. Clearance rates of this magnitude are typically associated with significant price rises in residential property markets; a development that would be of concern to the RBA, as such rises would threaten financial stability in the Australian economy. These clearance rates are, most probably, related to the optimistic tone recently found in the equity market, and clearance rates should moderate over time.


In the minutes released last week, the RBA indicated that the domestic economy is expected to grow below trend and that the inflation rate outlook remains very much contained. Such an outlook, as reiterated in the recent Testimony by the Governor, and a recent speech by Guy Debelle, affords an easing bias to monetary policy at this time, given that the non-mining sector requires additional stimulation in the context of a high Australian currency. However, a moderation in the very strong residential auction clearance rates, as recently observed, should be required before the RBA eases further, although other developments will also require consideration. As the recent elevation in clearance rates fades along with recent price appreciation in global equity markets, we estimate that cash rates will average around 2.75% for 2013, and end the year around 2.50%, which means that investors will need to obtain better returns than cash in the fixed income markets.