1. Financial conditions in Australia are currently restrictive, with household debt payments as a share of disposable income increasing significantly. However, payments for personal credit remain low due to decreased use of personal credit since 2008.
2. New housing loan commitments have increased, driven by investors and first home buyers, but are still below their peak levels. Extra payments into borrowers’ mortgage offset and redraw accounts have decreased compared to pre-pandemic levels.
3. Market expectations for the cash rate indicate a 40% chance of a further increase in the future, but some chance of a reduction by late 2024.
4. The Reserve Bank of Australia is considering its approach to reducing holdings of government bonds purchased during the pandemic. The current approach is to hold the bonds until maturity, but this will be actively considered given the Bank’s exposure to interest rate risk.
5. The Board decided to leave the cash rate target unchanged at this meeting, as the data did not warrant a revision to the outlook. The Board will continue to monitor economic data and risks to determine if further tightening of monetary policy is required to achieve the inflation target.
A Comprehensive Overview of the RBA Board’s Deliberations and Economic Assessments
The Reserve Bank of Australia (RBA) held its monetary policy meeting on 5 December 2023, where various economic factors and policy considerations were discussed in detail. The meeting, chaired by Governor Michele Bullock, involved key members and participants who analyzed international and domestic economic conditions, financial market developments, and the implications for monetary policy.
Global Economic Developments
The RBA Board noted some positive signs in global inflation, with headline rates declining due to lower oil prices and a gradual easing in core inflation. However, services sector inflation remained high in several countries, reflecting tight labor markets. Economic growth in advanced economies had slowed, particularly in Europe, while the United States showed more resilience. Labor market conditions had eased, with job vacancies falling and unemployment rates slightly increasing.
China’s Economic Scenario
In China, economic indicators were generally positive, with strong growth in retail sales and industrial production. However, the property sector continued to struggle with declining real estate investment. Iron ore prices had increased slightly, while coking coal prices fell due to resolved supply disruptions in Australia.
Domestic Economic Conditions in Australia
In Australia, inflation continued to moderate, with the CPI indicator for October showing a decline in annual inflation. Rents had decreased due to an increase in Commonwealth Rent Assistance, offsetting pressure from tight rental markets. Wages growth had picked up significantly, with the Wage Price Index recording its highest quarterly growth rate since its inception. Labor market conditions remained tight but showed signs of easing.
International Financial Markets
Most central banks in advanced economies had left policy rates unchanged, with expectations for further rate rises but also acknowledging more balanced risks. Government bond yields had declined, reflecting changing market expectations and a decrease in market-implied inflation expectations.
Domestic Financial Markets in Australia
Financial conditions in Australia were restrictive, with household debt payments increasing significantly. New housing loan commitments had risen, driven by investors and first home buyers. Market expectations for the cash rate path were slightly lower, with some chance of a reduction in the cash rate by late 2024.
Considerations for Monetary Policy
The RBA Board weighed the options of raising the cash rate target by a further 25 basis points or holding it steady. The decision to leave the cash rate target unchanged was based on the assessment that further data was needed to evaluate the evolving risks and balance them effectively. The Board remained committed to returning inflation to target and would continue to monitor global and domestic economic trends, as well as the labor market and inflation outlook.
The RBA Board’s decision to maintain the cash rate target at 4.35% and the interest rate on Exchange Settlement balances at 4.25% reflects a cautious approach in light of the current economic environment. The Board emphasized its determination to ensure inflation returns to target, balancing the need for further tightening of monetary policy against the risks of slowing aggregate demand. This meeting highlights the RBA’s ongoing commitment to navigating the complexities of the economic landscape to achieve stable and sustainable growth.