Monetary Policy and Recent Developments

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1 Monetary Policy and Recent Developments Merylin Coombs Deputy Head Economic Analysis Department September 15

2 The Reserve Bank of Australia is responsible for Monetary policy and market operations Payments system stability & efficiency Financial system stability (not supervisory responsibility for banks) Issuing Australia s currency notes Banker to the government Managing foreign exchange reserves

3 The Reserve Bank of Australia s objectives are Stability of the currency Maintenance of full employment Economic prosperity and welfare of the people of Australia As specified in the Reserve Bank Act (1959)

4 Monetary Policy The best way for the RBA to achieve these objectives is to maintain low and steady inflation Specifically, the objective is to achieve annual CPI inflation of - per cent, on average, over cycle Main tool is the overnight interest rate that banks charge to lend to other banks Liquidity operations are used to make sure the supply of liquidity in the system is sufficient to ensure this

5 goods and services How Does Monetary Policy Affect the Economy Rising unemployment, falling inflation Potential output.5 Wage Growth and Unemployment* 5 1, quarterly Falling unemployment, rising inflation Aggregate demand..5 June quarter 1. June quarter 1 Time Unemployment rate

6 How Does Monetary Policy Affect the Economy? Lower interest rates: encourage agents in the economy to bring activity forward by saving less or borrowing more (intertemporal substitution) increase disposable income of borrowers by reducing their interest payments, thus increasing their consumption and investment, but reduce the income of savers (cash flow channel dominated by borrowers in Australia) increase asset prices and therefore consumption and investment activity (wealth effect) typically lead to a depreciation of the exchange rate

7 How Does Monetary Policy Affect the Economy? Interest rates affect activity and inflation with a lag GDP Deviation from baseline* ppt Inflation Deviation from baseline* ppt * Response to cash rate held lower by 5 basis points for four quarters Source: RBA * Response to cash rate held lower by 5 basis points for four quarters Source: RBA. This means that it is necessary to forecast important macroeconomic variables, which is hard

8 Recent Developments

9 Australia s Trading Partner Growth* Year-average RBA forecast * Aggregated using total export shares Sources: ABS; CEIC Data; RBA; Thomson Reuters

10 China Activity Indicators Year-ended growth GDP Industrial production 1 5 Quarterly* 1 Real fixed asset investment Real retail sales * RBA estimates prior to December quarter 1 Sources: CEIC Data; RBA

11 Mt 6 China Steel and Iron Ore Markets Crude steel production Iron ore production Mt 1 5 US$/t Domestic steel price* Iron ore spot price** US$/t * Average of hot rolled steel sheet and steel rebar prices ** Free on board basis Sources: Bloomberg; CEIC Data; RBA

12 index, yen 11 Yen per A$ (LHS) Australian Dollar US$ per A$ (RHS) US$, euro 1. Euro per A$ (RHS) TWI (LHS) Sources: Bloomberg; RBA.

13 7 Cash Rate* * Data from September 15 onwards are expectations derived from interbank cash rate futures Sources: ASX; Bloomberg

14 GDP and Unemployment GDP growth Quarterly Year-ended Unemployment rate Quarterly Source: ABS

15 Household Income, Consumption and Wealth* Real, year-ended growth 1 5 Consumption Disposable income Saving ratio Net wealth** * Household sector includes unincorporated enterprises; disposable income is after tax and interest payments; income level smoothed with a two-quarter moving average between March quarter and March quarter ; saving ratio is net of depreciation ** Per cent of annual household disposable income, before the deduction of interest payments Sources: ABS; RBA

16 16 Capital City Housing Price Growth Six-month-ended annualised growth Sydney Houses Melbourne Other capitals* Apartments * Weighted average of Adelaide; Brisbane; Canberra; Darwin and Perth Sources: ABS; CoreLogic RP Data; RBA

17 Credit Growth by Sector Year-ended Housing Business 1 Total* * Includes housing, personal and business credit Sources: ABS; APRA; RBA

18 $b Measures of Private Business Investment Mining Nominal Non-mining $b 15 1 Upper and lower error bands*** National accounts* Capex survey Estimates** / 9 / 1 15 / 16 / 9 / 1 15 / 16 * Adjusted for second-hand asset transfers between the private and other sectors; excluding cultivated biological resources ** Estimates are firms expected capital expenditure, adjusted for the past average difference between expected and realised spending *** Error bands are based on the root mean square error of each adjusted estimate compared with the final outcome for investment ineach year Sources: ABS; RBA

19 $b Export Volumes* Log scale, quarterly $b 16 Iron ore Other resources 16 8 Coal Services Manufacturing Rural 8 LNG * Reference year is 1/1 Sources: ABS; Department of Industry and Science; RBA

20 $b Import Volumes* Log scale, quarterly Intermediate $b Consumption Services Capital * Reference year is 1/1 Source: ABS

21 Consolidated Budget Balance* Per cent of nominal GDP 15/16 budgets Forecasts /15 mid-year updates / 8 87 / 88 9 / 9 99 / 5 / 6 11 / 1 17 / 18 * Federal, state and territory governments; underlying cash balance adjusted for the RBA grant, excess RBA dividend payments and timing changes for some large payments Sources: ABS; Australian Treasury; RBA; State and Territory Treasuries

22 Australian Consolidated Government Budget Fiscal Balance* Impact* ppt Per cent of nominal GDP Forecasts ppt 15/16 budget Forecasts 15/16 budgets /15 mid-year 1/15 updates MYEFO / / 79 / / 9 / / 98 / 99 5 / / 9 / / 18 / 19 * * Negative Federal, change state and in territory the underlying governments; cash balance underlying as cash a perbalance cent of nominal GDP, adjusted adjusted for the for RBA the grant, RBA grant, excess excess RBA dividend RBA dividend payments payments and timing and timing changes changes for some for some large payments large payments Sources: ABS; Australian Treasury; RBA; State and Territory Treasuries

23 GDP Growth Forecast* Year-ended 9 per cent interval 7 per cent interval * Confidence intervals reflect RBA forecast errors since 199 Sources: ABS; RBA

24 Unemployment Rate Forecast* Quarterly 9 9 per cent interval per cent interval * Confidence intervals reflect RBA forecast errors since 199 Sources: ABS; RBA

25 . Net immigration Natural increase Population Growth* Year-ended contributions * Total population growth is the sum of the components Sources: ABS; RBA

26 Population Growth by State Year-ended Victoria 1 Queensland Western Australia South Australia 1 New South Wales Tasmania Source: ABS

27 Wage Price Index Growth Private sector Public sector 5 Year-ended Quarterly Source: ABS 9 15

28 Trimmed Mean Inflation Forecast* Year-ended 9 per cent interval 7 per cent interval * Confidence intervals reflect RBA forecast errors since 199 Sources: ABS; RBA

29 For more information Visit the Reserve Bank website: Chart Pack (updated monthly) Education Statistics