Monetary Policy and Recent Developments Merylin Coombs Deputy Head Economic Analysis Department September 15
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
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)
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
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.5..5 5. 5.5 6. Unemployment rate
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
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...6.6.15.15...1.1.5.5... 1 5 6 7 8 9 1 11 1 * Response to cash rate held lower by 5 basis points for four quarters Source: RBA.. 1 5 6 7 8 9 1 11 1 * 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
Recent Developments
Australia s Trading Partner Growth* Year-average RBA forecast 6 6 - - 198 1986 199 1998 1 16 * Aggregated using total export shares Sources: ABS; CEIC Data; RBA; Thomson Reuters
China Activity Indicators Year-ended growth GDP Industrial production 1 5 Quarterly* 1 Real fixed asset investment Real retail sales 15 1 7 11 15 7 11 15 * RBA estimates prior to December quarter 1 Sources: CEIC Data; RBA
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 75 15 5 9 5 7 11 15 7 11 15 * Average of hot rolled steel sheet and steel rebar prices ** Free on board basis Sources: Bloomberg; CEIC Data; RBA
index, yen 11 Yen per A$ (LHS) Australian Dollar US$ per A$ (RHS) US$, euro 1. Euro per A$ (RHS) 9.8 7 TWI (LHS).6 5 7 9 11 1 15 Sources: Bloomberg; RBA.
7 Cash Rate* 7 6 6 5 5 1 1 8 1 16 * Data from September 15 onwards are expectations derived from interbank cash rate futures Sources: ASX; Bloomberg
6 7 6 5 GDP and Unemployment GDP growth Quarterly Year-ended Unemployment rate Quarterly 6 7 6 5 Source: ABS 7 11 15
Household Income, Consumption and Wealth* Real, year-ended growth 1 5 Consumption 1 5 1 Disposable income Saving ratio 1 5 5 65 Net wealth** 65 55 55 5 5 5 5 199 1995 5 1 15 * 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 Capital City Housing Price Growth Six-month-ended annualised growth Sydney Houses Melbourne Other capitals* 16 8 8-8 -8 Apartments -16 1 15 1 15 1 15-16 * Weighted average of Adelaide; Brisbane; Canberra; Darwin and Perth Sources: ABS; CoreLogic RP Data; RBA
Credit Growth by Sector Year-ended Housing Business 1 Total* 1-1 -1 1979 1985 1991 1997 9 15 * Includes housing, personal and business credit Sources: ABS; APRA; RBA
$b Measures of Private Business Investment Mining Nominal Non-mining $b 15 1 Upper and lower error bands*** 15 1 9 National accounts* Capex survey Estimates** 9 6 6 / 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
$b Export Volumes* Log scale, quarterly $b 16 Iron ore Other resources 16 8 Coal Services Manufacturing Rural 8 LNG 1 9 15 9 15 1 * Reference year is 1/1 Sources: ABS; Department of Industry and Science; RBA
$b Import Volumes* Log scale, quarterly Intermediate $b Consumption 16 16 Services Capital 8 8 5 1 15 * Reference year is 1/1 Source: ABS 5 1 15
Consolidated Budget Balance* Per cent of nominal GDP 15/16 budgets Forecasts - - - - 1/15 mid-year updates -6-6 81 / 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
Australian Consolidated Government Budget Fiscal Balance* Impact* ppt Per cent of nominal GDP Forecasts ppt 15/16 budget Forecasts 15/16 budgets 1-1 - -1- --1 1/15 mid-year 1/15 updates MYEFO --6-6- 81 / 8 7887 / 79 / 88 9 88 / 9 / 89 99 / 98 / 99 5 / 6 811 / 9 / 1 1718 / 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
GDP Growth Forecast* Year-ended 9 per cent interval 7 per cent interval 1 1 1 15 16 17 * Confidence intervals reflect RBA forecast errors since 199 Sources: ABS; RBA
Unemployment Rate Forecast* Quarterly 9 9 per cent interval 9 6 6 7 per cent interval 1997 7 1 17 * Confidence intervals reflect RBA forecast errors since 199 Sources: ABS; RBA
. Net immigration Natural increase Population Growth* Year-ended contributions. 1.5 1.5 1. 1..5.5.. 1979 1986 199 7 1 * Total population growth is the sum of the components Sources: ABS; RBA
Population Growth by State Year-ended Victoria 1 Queensland Western Australia South Australia 1 New South Wales Tasmania -1 1 1 1-1 Source: ABS
Wage Price Index Growth Private sector Public sector 5 Year-ended 5 5 5 1 Quarterly 1 1 1 9 15 Source: ABS 9 15
Trimmed Mean Inflation Forecast* Year-ended 9 per cent interval 7 per cent interval 1 1 1 1 15 16 17 1 * Confidence intervals reflect RBA forecast errors since 199 Sources: ABS; RBA
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