Recession Australia

Minutes of the Monetary Policy Meeting of the Reserve Bank Board

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Considerations for Monetary Policy

Members discussed the neutral real interest rate and its decline over the preceding decade. The neutral real interest rate is the interest rate at which output growth is at potential and inflation is stable. Members noted that it is not possible to measure the neutral real interest rate directly, but that it can be inferred from the behaviour of other variables.

Members discussed the Bank’s work estimating the neutral real interest rate for Australia. The various estimates suggested that the rate had been broadly stable until around 2007, but had since fallen by around 150 basis points to around 1 per cent. This equated to a neutral nominal cash rate of around 3½ per cent, given that medium-term inflation expectations were well anchored around 2½ per cent, although there is significant uncertainty around this estimate. Members noted that some of this decline could be attributed to lower potential output growth, but the increase in risk aversion around the time of the global financial crisis was likely to have been a more important factor, given that the bulk of the decline in the estimated neutral real interest rate had occurred around that time. Estimates of neutral real interest rates for other economies had shown a similar decline. All estimates of the neutral real interest rate for Australia suggested that monetary policy had been clearly expansionary for the preceding five years or so. It was also noted that a reduction in risk aversion and/or an increase in the potential growth rate could see the neutral real interest rate rise again.

Turning to the immediate decision regarding the level of the cash rate, members noted that the broad-based recovery in the global economy had continued. There had been further signs that investment was increasing and labour markets had tightened further in many advanced economies. This was expected to lead to a pick-up in growth in wages and prices over time. In this context, members noted that a number of central banks had become more positive about domestic economic conditions, and financial market pricing suggested that there had been upward revisions to the expected path of future monetary policy in these economies.

Domestically, the data available for the June quarter had generally been positive, following the slower growth recorded for the March quarter. Although recent indicators suggested that consumption growth had increased in the June quarter, members noted that there were still risks to consumption growth should household income growth remain subdued, particularly given the high levels of household debt. Against this background, the recent improvement in labour market data had been a positive development. Members noted that the strength of recent labour market data had removed some of the downside risk in the Bank’s forecast of wage growth.

Business surveys had continued to suggest that business conditions were above average. Recent state budgets and data on non-residential construction suggested that the contribution to growth from infrastructure investment would rise. The pipeline of residential construction was expected to support dwelling investment over the forecast period. The economic outlook continued to be supported by the low level of interest rates. The depreciation of the exchange rate since 2013 had also assisted the economy in its transition following the mining investment boom. An appreciating exchange rate would complicate this adjustment.

Conditions in established housing markets had continued to vary considerably across the country. Members recognised that it was too early for the prudential supervision measures announced by the Australian Prudential Regulation Authority, which were designed to help address the risks associated with high and rising levels of indebtedness, to have had their full effect.

Members regarded the improvement in the world economy over the preceding months as a welcome development. Nevertheless, they assessed that current economic conditions in Australia, and the outlook for growth and inflation, meant that developments in the labour and housing markets continued to warrant careful monitoring. Taking into account all the available information, the Board judged that holding the accommodative stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.

The Decision

The Board decided to leave the cash rate unchanged at 1.5 per cent.

(Reserve Bank of Australia)