Economic Insights

Economics | October 6 2015

Contentment: neutral stance maintained

Reserve Bank Board meeting
The cash rate has been left at a record low of 2.00 per cent for a fifth month (six months of rates at 2 per
cent). The Reserve Bank has left the accompanying statement the same almost word-for-word.
The Aussie dollar rose by a third of a cent as investors gave up on hopes for a rate cut in the future.

What does it all mean?

In outlining where the Reserve Bank stands on interest rate settings, the Governor recently told the House of
Representatives Economics Committee, "I think we are pretty content where we are right now. And little more
needs to be said.

The key question now, is what will be the next move on rates? It is clear to us that the economy is picking up
momentum but there are still challenges ahead, so interest rates should remain on hold. But there is certainly no
case for rate cuts. Consider:
Car sales are at record highs
Building approvals are at record highs
Job ads have lifted for 14 of the last 16 months
Employment has posted the biggest 6-month gain in 4 years
Manufacturing & services sectors are expanding
The Aussie dollar has fallen around US17 cents over the past year

The only real changes to the text of the statement. In September: Equity markets have been considerably more
volatile of late, associated with developments in China, though other financial markets have been relatively
stable. In October: Equity market volatility has continued, but the functioning of financial markets generally has
not, to date, been impaired.

Also, in September: The Bank is working with other regulators to assess and contain risks that may arise from
the housing market. In October: Regulatory measures are
helping to contain risks that may arise from the housing
market.

The only other change: the Reserve Bank noted Dwelling

prices continue to rise strongly in Sydney and Melbourne In
September it only referred to prices in Sydney.

Bottom line is that there has been no change to the neutral

policy stance a stance that suggests that the next move in
rates could be either up or down.

Perspectives on interest rates

The previous rate cut was in May 2015 (25 basis points), taking
the cash rate to a record low of 2.00 per cent.

There have been 10 rate cuts since November 2011.

The Reserve Bank had previously lifted rates seven times from

Craig James Chief Economist (Author)

Twitter: @CommSec
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Economic Insights: Contentment: Neutral stance maintained

October 2009 to November 2010 a total of 1.75 percentage points, from 3.00 per cent to 4.75 per cent.

What are the implications of todays decision?

CommSec expects the cash rate to remain unchanged over the next year. There is certainly no case to cut rates
at present, but it is far too early to be talking about rate hikes given that inflation is still low and broad economic
growth rates are below normal.

At present, Aussie households are devoting around 22 per cent of their assets to cash & bank deposits, broadly in
line with the longer-term average. But with interest rates at record lows, arguably a smaller proportion of assets
should be held in these safe-haven assets. Aussie investors will need to continue to re-calibrate their holdings in
a low rate environment.

Comparing the two most recent statements

The statement from the September 2015 meeting is on the left; the statement from todays October 2015 meeting
is on the right. Emphasis has been added to significant changes in the wording in the statements.

Media Release

Media Release

No: 2015-15
Date: 1 September 2015
Embargo: For Immediate Release

No: 2015-18
Date: 6 October 2015
Embargo: For Immediate Release

Statement by Glenn Stevens, Governor:

Monetary Policy Decision

Statement by Glenn Stevens, Governor:

Monetary Policy Decision

At its meeting today, the Board decided to leave the cash rate unchanged at
2.0 per cent.

At its meeting today, the Board decided to leave the cash rate unchanged at
2.0 per cent.

The global economy is expanding at a moderate pace, with some further

softening in conditions in China and east Asia of late, but stronger US
growth. Key commodity prices are much lower than a year ago, in part
reflecting increased supply, including from Australia. Australia's terms of trade
are falling.

The global economy is expanding at a moderate pace, with some further

softening in conditions in China and east Asia of late, but stronger US growth.
Key commodity prices are much lower than a year ago, in part reflecting
increased supply, including from Australia. Australia's terms of trade are
falling.

The Federal Reserve is expected to start increasing its policy rate over the
period ahead, but some other major central banks are continuing to ease
policy. Equity markets have been considerably more volatile of late,
associated with developments in China, though other financial markets
have been relatively stable. Long-term borrowing rates for most sovereigns
and creditworthy private borrowers remain remarkably low. Overall, global
financial conditions remain very accommodative.

The Federal Reserve is expected to start increasing its policy rate over the
period ahead, but some other major central banks are continuing to ease
policy. Equity market volatility has continued, but the functioning of
financial markets generally has not, to date, been impaired. Long-term
borrowing rates for most sovereigns and creditworthy private borrowers
remain remarkably low. Overall, global financial conditions remain very
accommodative.

In Australia, most of the available information suggests that moderate

expansion in the economy continues. While growth has been somewhat
below longer-term averages for some time, it has been accompanied with
somewhat stronger growth of employment and a steady rate of
unemployment over the past year. Overall, the economy is likely to be
operating with a degree of spare capacity for some time yet, with domestic
inflationary pressures contained. Inflation is thus forecast to remain consistent
with the target over the next one to two years, even with a lower exchange
rate.

In Australia, the available information suggests that moderate expansion in

the economy continues. While growth has been somewhat below longer-term
averages for some time, it has been accompanied with somewhat stronger
growth of employment and a steady rate of unemployment over the past year.
Overall, the economy is likely to be operating with a degree of spare capacity
for some time yet, with domestic inflationary pressures contained. Inflation is
thus forecast to remain consistent with the target over the next one to two
years, even with a lower exchange rate.

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 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 commercial property have been supported by lower long-term interest
rates, while equity prices have moved lower and been more volatile recently,
in parallel with developments in global markets. The Australian dollar is
adjusting to the significant declines in key commodity prices.
The Board today judged that leaving the cash rate unchanged was
appropriate at this meeting. Further information on economic and financial
conditions to be received over the period ahead will inform the Board's
ongoing assessment of the outlook and hence whether the current stance of
policy will most effectively foster sustainable growth and inflation consistent
with the target.

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 growth in lending to the housing
market broadly steady over recent months. Dwelling prices continue to rise
strongly in Sydney and Melbourne, though trends have been more varied in
a number of other cities. Regulatory measures are helping to contain risks
that may arise from the housing market. In other asset markets, prices for
commercial property have been supported by lower long-term interest rates,
while equity prices have moved lower and been more volatile recently, in
parallel with developments in global markets. The Australian dollar is adjusting
to the significant declines in key commodity prices.
The Board today judged that leaving the cash rate unchanged was
appropriate at this meeting. Further information on economic and financial
conditions to be received over the period ahead will inform the Board's
ongoing assessment of the outlook and hence whether the current stance of
policy will most effectively foster sustainable growth and inflation consistent
with the target.

October 6 2015