Yesterday’s Reserve Bank minutes from its March meeting shed plenty of light on the bank’s current thinking — much of which was missed by the ensuing media commentary. As always, it pays to examine what the bank says, and even the order in which it says it, rather than rely on what the media says it said.
First, the dollar. From “jawboning” the market on the currency’s high value in post-RBA board meeting notes to speeches warning of possible “intervention”, RBA governor Glenn Stevens spent every public opportunity in October, November and December urging the market to take the dollar lower. In an interview with The Australian Financial Review he even nominated the 85 US cent level as his target. In November’s final Statement of Monetary Policy for 2013, the bank made numerous mentions of the pressures the dollar was causing and the need for it to go lower.
This morning the dollar was trading around 91.20 US cents — higher than when it started the year. Apart from a dip in January, it has spent most of the year so far in the narrow range of just under 89 US cents to just under 91 US cents, with the latest breakout starting late last week with the stronger-than-expected February jobs data (the data that forced Westpac chief economist Bill Evans to abandon his shag-on-a-rock forecast of two more rate cuts from the RBA).
But yesterday’s minutes from the bank’s March board meeting were notable for only the briefest of mentions of the dollar, compared to the virtual barrage of commentary late last year: “[t]he Australian dollar had appreciated a little, although it remained around 14 per cent below its peak in early April 2013.”
And that was that. Has the RBA have resigned itself to accepting the currency is probably not going to go much lower in the short term?
Second, wages. This is the bank on wages growth:
“Members began their discussion of the domestic economy with the labour market. They noted that wage growth remained subdued, in line with the weak conditions in the labour market and relatively low consumer and union inflation expectations.”
Note that this was top of the agenda when the board came to discussing the health of the domestic economy — not the value of the dollar, not the mining investment boom, not house prices, but the labour market and the way wage costs continue to fall. Again, like the 20-plus times the bank mentioned slow wages growth in its February Statement of Monetary Policy, you’d think the bank was trying to tell us something about its views on an issue that has been the subject of considerable stupidity in the media. As if to reinforce the point:
“The wage price index rose by 0.7 per cent in the December quarter, to be 2.6 per cent higher over the year, the lowest year-ended outcome since the series began in the late 1990s. Wage growth in the public sector over 2013 was around its slowest pace since 2000, consistent with ongoing fiscal restraint. Business surveys indicated that wage growth in the March quarter was likely to remain subdued, which was consistent with liaison reports that firms were having little difficulty finding suitable labour.”
And then there’s the housing boom — especially construction, which will be the main driver of growth for the economy as the mining investment boom fades. The RBA said:
“Members observed that conditions in the established housing market had remained strong. Housing price inflation had declined somewhat from the fast pace recorded in 2013, although the data were less informative around this time of year owing to relatively low turnover. Ongoing strength in the established housing market and low lending rates were expected to support new dwelling activity. Dwelling investment was expected to record a slight decline in the December quarter, but a strong increase in approvals for residential buildings over recent months — both for higher-density and detached dwellings — pointed to a substantial increase in dwelling investment in subsequent quarters.”
That’s important because it means that the bank’s low interest rate settings are feeding not merely into price growth in the established housing market but also into new dwelling construction, a key outcome if we’re to transition to a post-mining investment boom environment without a collapse in growth. And speaking of which, remember that huge and worrying fall in investment in the December quarter? The RBA isn’t too fussed about it.
“In the first reading for 2014/15, the ABS capital expenditure data suggested that a small improvement was in prospect for non-mining business investment. Members noted that the ABS capital expenditure survey reported that mining investment was expected to decline sharply in 2014/15, which had already been embodied in the Bank’s forecasts for some time.”
That is, don’t panic, things are tracking broadly as forecast. That’s also the tone of the bank’s observations about the soft labour market, despite high-profile job loss announcements, which it acknowledged could affect consumer confidence.