June 2015 Interest Rates

Statement by Glenn Stevens, Governor: Monetary Policy Decision – We have “INKed” it to plain language to help explain under each paragraph.


At its meeting today, the Board decided to leave the cash rate unchanged at 2.0 percent. The global economy is expanding at a moderate pace, but some key commodity prices are much lower than a year ago. This trend appears largely to reflect increased supply, including from Australia. Australia’s terms of trade are falling nonetheless.

INKed:
No change to the cash rate (i.e. no reason for the banks to change interest rates). World economic growth is up. World commodity prices are down due to a global glut. The amount of money Australia’s exports generate compared to the amount of money our imports cost (terms of trade) is falling.

 

The Federal Reserve is expected to start increasing its policy rate later this year, but some other major central banks are continuing to ease policy. Hence, global financial conditions remain very accommodative. Despite some increases in bond yields recently, long-term borrowing rates for sovereigns and creditworthy private borrowers remain remarkably low.

INKed:
US interest rates are expected to rise. Other countries are still lowering theirs. Global money is still cheap to borrow.

In Australia, the available information suggests the economy has continued to grow, but at a rate somewhat below its longer-term average. Household spending has improved, including a large rise in dwelling construction, and exports are rising. But a key drag on private demand is weakness in business capital expenditure in both the mining and non-mining sectors and this is likely to persist over the coming year. Public spending is also scheduled to be subdued. Overall, the economy is likely to be operating with a degree of spare capacity for some time yet. With very slow growth in labour costs, inflation is forecast to remain consistent with the target over the next one to two years, even with a lower exchange rate.

INKed:
Australia’s economic growth is up but less than its average. Household spending is up. Exports are up (due to a lower dollar, but we are getting less for our commodities, hence the fall in the terms of trade). Companies are not investing. Governments have no plans to spend. Inflation is tipped to remain low.

In such circumstances, monetary policy needs to be accommodative. Low interest rates are acting to support borrowing and spending. Credit is recording moderate growth overall, with stronger lending to businesses and growth in lending to the housing market broadly steady over recent months. Dwelling prices continue to rise strongly in Sydney, though trends have been more varied in a number of other cities. The Bank is working with other regulators to assess and contain risks that may arise from the housing market. In other asset markets, prices for equities and commercial property have been supported by lower long-term interest rates.

INKed:
Interest rates should remain low. Lending is increasing. The Sydney property market is still rising but other cities have not experienced such a strong market. To assist in controlling the growth of the Sydney property market, banks are making lending more difficult to investors. Shares, commercial property and other assets have benefited from the low interest rates.

The Australian dollar has declined noticeably against a rising US dollar over the past year, though less so against a basket of currencies. Further depreciation seems both likely and necessary, particularly given the significant declines in key commodity prices.

INKed:
Aussie Dollar is down compared to the US dollar. Not as much against some other currencies. It should continue to fall against the US dollar.

Having eased monetary policy last month, the Board today judged that leaving the cash rate unchanged was appropriate at this meeting. Information on economic and financial conditions to be received over the period ahead will inform the Board’s assessment of the outlook and hence whether the current stance of policy will most effectively foster sustainable growth and inflation consistent with the target.

INKed:
“The cash rate will stay the same at 2.0%. The Reserve Bank will look to see if the future economic growth and inflation rates are in their predicted targets at the next assessment meeting.”