Wishes Granted: Reserve Bank Shifts to Neutral

Statement of Monetary Policy. Job advertisements.

• The Reserve Bank has toned down its rhetoric on future interest rate moves. The Reserve Bank now maintains a 'neutral' monetary policy stance rather than a tightening bias (or inclination to lift interest rates). The Reserve Bank has painted the picture of an economy growing at a sustainable pace with inflation under control.
• The total number of internet and newspaper job advertisements rose by 0.2 per cent in July. Internet job ads rose by 0.3 per cent while newspaper job ads fell by 0.2 per cent.
• The Olivier Internet Job Index rose by 2.7 per cent in July (seasonally adjusted) to a record high.
• The scenario painted by the Reserve Bank is a win-win for sharemarket investors. The domestic economy is growing at a sustainable pace, the global economy is in good shape and interest rate stability is set to continue through to the end of the year.

Overall analysis

• Reserve Bank policymakers were given three wishes by their economic fairy godmother and had all the wishes granted. Not only is inflation under control, but the housing market has completed a soft landing and Australia's domestic economy is growing at a sustainable pace. Is it any wonder that the Reserve Bank is feeling decidedly relaxed and comfortable? So comfortable in fact that the Reserve Bank has dropped the threat to lift interest rates. By every sense of the word interest rate settings are now solidly on hold.
• The Reserve Bank doesn't believe it will fall into the same trap as Cinderella and have its economic wishes reversed at midnight. The Bank believes that the risks to its forecasts are now evenly balanced, whereas earlier in the year they were skewed to the upside.
• It comes as no surprise that the Reserve Bank has downgraded its monetary policy stance. The domestic economy has softened through the autumn and winter months and inflation is clearly under control. We have stressed for some time that, if the tightening bias still existed, it would be held much more loosely. In the end, the Reserve Bank decided that the tightening bias had to go, given that there is no way it could defend the position. In practical terms the new neutral stance means that interest rates could go either way - up or down.
• The Reserve Bank is in 'wait and see mode' on interest rates, but there is no suggestion in its latest commentary that the economy is in need of interest rate stimulus. Far from it. The Reserve Bank believes that inflation is still edging higher, profitability is strong and it expects that firm labour market conditions will support both household spending and housing market activity.

What do the figures show?

The Reserve Bank Statement on Monetary Policy

• The Reserve Bank has adopted a neutral monetary policy stance. In the last Statement, released in May, the Bank said: "Based on previous cyclical experience, it would be surprising if interest rates did not have to increase further at some stage of the current expansion." However this reference to interest rates has been removed from the August Statement, replaced with the Bank merely noting that "the Board will continue to monitor developments and make such adjustments as may be required to promote sustainable growth of the economy with low inflation."
• The Reserve Bank is much more relaxed about current economic conditions. The Bank says that the economy is growing at a "reasonable though not excessive pace", that domestic demand has slowed to a sustainable trend and medium-term inflation risks were not as strong as they were earlier in the year.
• The Economy: "The economic situation under consideration by the Board at recent meetings has been characterised by a number of favourable developments"
• "The economy seems likely to remain on a moderate growth path through 2005."
• Inflation: "...inflation is evolving as foreshadowed in the May Statement on Monetary Policy, with underlying inflation still expected to increase gradually, reaching 3 per cent in the second half of 2006. However, based on the easing of demand growth apparent so far this year, this is likely to be the peak, with underlying inflation not expected to increase beyond 3 per cent in 2007."
• ..."the risks to the projection of underlying inflation appear to be balanced"
• ..."producer price data indicate that price increases in the first half of 2005 were more moderate than those seen in the second half of 2004"
• Financial Conditions: "Financial conditions are at present reasonably accommodative"
• "...Policy may in fact be more accommodative than would be suggested by some of these standard benchmarks" (that is, longer-term averages for interest rates).
• Company profits: The Reserve Bank says that "corporate profitability remains strong." It has also provided an assessment of recent corporate profit warnings. The Bank said that it has been mainly small companies downgrading earnings. The Reserve Bank also said that "actual earnings in the year to date have continued at high levels."
• House prices: The Reserve Bank says that house prices have been flat over the past 18 months after rising by 29 per cent in the 18 months to December quarter 2003.
• Housing activity: "The large amount of work in the pipeline should continue to provide support to construction in the short term."
• Household sector: "Households now seem to have entered a phase in which they are consolidating their balance sheets, borrowing less and increasing their spending less quickly than they were a year or two ago."

Economic Data: Job Advertisements

• Job advertisements rose modestly in July, edging closer to the record high set in May. The combined number of internet and newspaper job advertisements, as tracked by ANZ, rose by 0.3 per cent in July after falling by 2.4 per cent in June and rising 2.1 per cent in May. Job ads have only fallen three times in the past year. There were 155,012 job ads per week in July, up 24.6 per cent on a year earlier.
• The number of print (newspaper) job advertisements fell by 0.2 per cent in July while internet job ads rose by 0.3 per cent in the month.
• The state/territory break-up is only available for the newspaper job ads series. Job ads rose most in Northern Territory (up 2.4 per cent), followed by Western Australia (up 2.2 per cent), South Australia (up 1.7 per cent), Victoria (up 1.2 per cent) and ACT (up 1.0 per cent). Job ads fell most in Tasmania (down 4.6 per cent), followed by Queensland (down 3.4 per cent) and NSW (down 1.5 per cent).
• The Olivier Internet Job Index rose by 2.7 per cent in July (seasonally adjusted) to a fresh record high. Olivier counted a weekly average of 168,083 internet job ads in July. Amongst the strongest sectors in June were Banking (up 21.6 per cent) and Insurance & Superannuation (up 11.2 per cent). Meanwhile jobs in the Transport sector eased (down 4.2 per cent) but following gains of 15.9 per cent in June.

What is the importance of the data?

• The monthly Job Advertisements release is a leading employment indicator. Employers only seek additional staff if business activity is strong, and more importantly, if they expect that conditions will remain favourable in coming months. It takes around 5-6 months for the new staff to be added to the payrolls. As a result, the latest job advertisement data will be reflected in employment estimates in the December quarter of 2005.

What are the implications for interest rates and investors?

• The scenario painted by the Reserve Bank is a win-win for sharemarket investors. The domestic economy is growing at a sustainable pace, the global economy is in good shape and interest rate stability is set to continue through to the end of the year.
• The change in the Reserve Bank's policy bias is positive for interest rate sensitive sections of the sharemarket, especially banks.
• It is too early to be speculating about rate cuts. There is nothing in the Reserve Bank's latest commentary to suggest that the next move in interest rates will be down not up. And that means that the best advice is to factor in a small increase in interest rates over the next 12-18 months.