Statement by the Monetary Policy Board: Monetary Policy Decision

At its meeting today, the Board decided to lower the cash rate target by 25 basis points to 3.85 per cent.

Inflation continues to moderate.

Inflation has fallen substantially since the peak in 2022, as higher interest rates have been working to bring aggregate demand and supply closer towards balance. Data on inflation for the March quarter provided further evidence that inflation continues to ease. At 2.9 per cent, annual trimmed mean inflation was below 3 per cent for the first time since 2021 and headline inflation, at 2.4 per cent, remained within the target band of 2–3 per cent. Staff forecasts released today project that while headline inflation is likely to rise over the coming year to around the top of the band as temporary factors unwind, underlying inflation is now expected to be around the midpoint of the 2–3 per cent range throughout much of the forecast period.

The outlook remains uncertain.

Uncertainty in the world economy has increased over the past three months and volatility in financial markets rose sharply for a time. While recent announcements on tariffs have resulted in a rebound in financial market prices, there is still considerable uncertainty about the final scope of the tariffs and policy responses in other countries. Geopolitical uncertainties also remain pronounced. These developments are expected to have an adverse effect on global economic activity, particularly if households and firms delay expenditure pending greater clarity on the outlook. This has also contributed to a weaker outlook for growth, employment and inflation in Australia. That said, world trade policy is changing rapidly, thereby making the central forecasts subject to considerable uncertainty.

Setting aside overseas developments, private domestic demand appears to have been recovering, real household incomes have picked up and there has been an easing in some measures of financial stress. However, businesses in some sectors continue to report that weakness in demand makes it difficult to pass on cost increases to final prices.

At the same time, a range of indicators suggest that labour market conditions remain tight. Employment is continuing to grow, measures of labour underutilisation are at relatively low rates and business surveys and liaison suggest that availability of labour is still a constraint for a range of employers. Looking through quarterly volatility, wages growth has softened over the past year or so but productivity growth has not picked up and growth in unit labour costs remains high.

There are uncertainties about the outlook for domestic economic activity and inflation stemming from both domestic and international developments. While the central projection is for growth in household consumption to continue to increase as real incomes rise, recent data suggest that the pick-up will be a little slower than was expected three months ago. There is a risk that any pick-up in consumption is even slower than this, resulting in continued subdued growth in aggregate demand and a sharper deterioration in the labour market than currently expected. Alternatively, labour market outcomes may prove stronger than expected, given the signal from a range of leading indicators.

More broadly, there are uncertainties regarding the lags in the effect of monetary policy and how firms’ pricing decisions and wages will respond to the demand environment and weak productivity outcomes while conditions in the labour market remain tight.

Maintaining low and stable inflation is the priority.

The Board judged that the risks to inflation have become more balanced. Inflation is in the target band and upside risks appear to have diminished as international developments are expected to weigh on the economy. With inflation expected to remain around target, the Board therefore judged that an easing in monetary policy at this meeting was appropriate. The Board assesses that this move will make monetary policy somewhat less restrictive. It nevertheless remains cautious about the outlook, particularly given the heightened level of uncertainty about both aggregate demand and supply. The Board considered a severe downside scenario and noted that monetary policy is well placed to respond decisively to international developments if they were to have material implications for activity and inflation in Australia.

The Board will be attentive to the data and the evolving assessment of risks to guide its decisions. In doing so, it will pay close attention to developments in the global economy and financial markets, trends in domestic demand, and the outlook for inflation and the labour market. The Board is focused on its mandate to deliver price stability and full employment and will do what it considers necessary to achieve that outcome.

Statement by the Reserve Bank Board: Monetary Policy Decision

At its meeting today, the Board decided to leave the cash rate target unchanged at 4.35 per cent and the interest rate paid on Exchange Settlement balances unchanged at 4.25 per cent.

Underlying inflation remains too high.

Inflation has fallen substantially since the peak in 2022, as higher interest rates have been working to bring aggregate demand and supply closer towards balance. Measures of underlying inflation are around 3½ per cent, which is still some way from the 2.5 per cent midpoint of the inflation target.

The most recent forecasts published in the November Statement on Monetary Policy (SMP) do not see inflation returning sustainably to the midpoint of the target until 2026. The Board is gaining some confidence that inflationary pressures are declining in line with these recent forecasts, but risks remain.

The outlook remains uncertain.

While underlying inflation is still high, other recent data on economic activity have been mixed, but on balance softer than expected in November.

Growth in output has been weak. National accounts for the September quarter show that the economy grew by only 0.8 per cent over the past year. Outside of the COVID-19 pandemic, this is the slowest pace of growth since the early 1990s. Past declines in real disposable income and the ongoing effect of restrictive financial conditions continued to weigh on household consumption spending, particularly on discretionary items.

A range of indicators suggest that labour market conditions remain tight; while those conditions have been easing gradually, some indicators have recently stabilised. The unemployment rate was 4.1 per cent in October, up from 3.5 per cent in late 2022. That said, employment grew strongly over the three months to October, the participation rate remains close to record highs, vacancies are still relatively high and average hours worked have stabilised. At the same time, some cyclical labour market indicators, including youth unemployment and underemployment rates, have recently declined.

Wage pressures have eased more than expected in the November SMP. The rate of wages growth as measured by the Wage Price Index was 3.5 per cent over the year to the September quarter, a step down from the previous quarter, but labour productivity growth remains weak.

Taking account of recent data, the Board’s assessment is that monetary policy remains restrictive and is working as anticipated. Some of the upside risks to inflation appear to have eased and while the level of aggregate demand still appears to be above the economy’s supply capacity, that gap continues to close.

The central projection is for growth in household consumption to increase as income growth rises. September quarter data suggest that both incomes and consumption had recovered a little slower than forecast, but more recent information has suggested a pick-up in consumption in October and November. There is a risk that any pick-up in consumption is slower than expected, resulting in continued subdued output growth and a sharper deterioration in the labour market. More broadly, there are uncertainties regarding the lags in the effect of monetary policy and how firms’ pricing decisions and wages will respond to the slow growth in the economy and weak productivity outcomes at a time of excess demand, and while conditions in the labour market remain tight.

There remains a high level of uncertainty about the outlook abroad. Most central banks have eased monetary policy as they become more confident that inflation is moving sustainably back towards their respective targets. They note, however, that they are removing only some restrictiveness and remain alert to risks in both directions, namely weaker labour markets and stronger inflation. Geopolitical uncertainties remain pronounced.

Sustainably returning inflation to target is the priority.

Sustainably returning inflation to target within a reasonable timeframe remains the Board’s highest priority. This is consistent with the RBA’s mandate for price stability and full employment. To date, longer term inflation expectations have been consistent with the inflation target and it is important that this remains the case.

While headline inflation has declined substantially and will remain lower for a time, underlying inflation is more indicative of inflation momentum, and it remains too high. The November SMP forecasts suggest that it will be some time yet before inflation is sustainably in the target range and approaching the midpoint. Recent data on inflation and economic conditions are still consistent with these forecasts, and the Board is gaining some confidence that inflation is moving sustainably towards target.

The Board will continue to rely upon the data and the evolving assessment of risks to guide its decisions. In doing so, it will pay close attention to developments in the global economy and financial markets, trends in domestic demand, and the outlook for inflation and the labour market. The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome.

The correct answer is “we don’t know.” No one does. 
Let’s guess – we may as well, in the absence of any intelligent analysis.

Share prices are down.

We know that.

But unless we are about to cash in our shares, does it matter? They aren’t down because the companies are out of business – though many may be struggling. Share prices in fact reflect anticipated future company earnings – that is, profitability – and that could mean this year’s profitability or that in ten years’ time.

You could say that the buyers are the optimists, and figure their expectations of future profitability into their preparedness to buy the shares.

Sellers, on the other hand, may be pessimistic about the same company shares, or may have a different time-frame for their expectations.

So what do we learn from this?

Once again, the lesson is – “It’s all about Income.”
But, then again, why are we investing? As our Client, we assume you are investing for your financial security – in most cases this means 
to be debt-free and have an adequate lifetime income-stream (ie a pension).

Well, – and stating the obvious – its not about 
gambling on share-price increases. (Did someone 
say ‘Which increases?”)

Whilst there’s never any absolute certainty of outcome, both reason and history have clearly demonstrated that the best chance of reliability of a consistent and growing income-stream is that which flows from a well-managed, reasonably diversified, Australian share portfolio 
– ideally within one or more managed funds such 
as those that have for many years made up the Superannuation and Pension funds of our many Clients.

Australian Shares. Managed Funds. Add to these, the (generally unrecognised) benefit of Imputation Credits that enhance your income-return, and we have a potent formula for seeing us – and our savings – through whatever the future holds.

With the right investments, we can have cause 
for optimism.

Here’s to a Covid-free future.

Beware of the Next Virus... It’s Coming!

The Corona Virus is the forerunner. This one is unavoidable! It will infect every living soul, no exceptions. It’s not fatal, but it is potentially disastrous.

It is a direct consequence of the Corona Virus, and no-one can escape this one.

Where is this horror-virus coming from?

We are breeding it. Deliberately. Here in Australia. So is every other country in the World.

Why? How? What is it?

As we know, our government - and governments everywhere - are embarking on “economic stimulus packages” to counter the disastrous effects of the current pandemic.

This is commendable and necessary.

However, it means one thing: they are spending money. But it's money they don’t have! They will have to print it!

This translates to one inevitable result: a highly infective economic virus.

It’s called INFLATION.

Inflation means RISING PRICES - of everything. Your Cash will lose value. Your money will buy less at the shops. Everything will cost more.

You will be poorer - inevitably.

Australia has enjoyed almost three decades of economic prosperity and negligible Inflation.

No doubt, we are well placed to weather the economic storm, but - unavoidably - the price will be high inflation - the disease of the 1970’s and 1980’s, but this outbreak will likely be worse.

Here’s the Question

Is Cash (in the bank, or under the bed, or in your SuperFund) the safest asset?

Interest rates are the lowest in living memory and are destined to fall further. Couple this fact with the government’s printing money and we have a potent formula for personal financial disaster.

The Lesson - The Safeguard

Do not be tempted to turn your investment assets - whatever they are - into Cash.

Inflation means that you will need more cash to pay for goods and services, certainly. But equally, you’ll need more cash to buy shares and real estate. They - notwithstanding the present (and future) volatility - will hold, and increase their value.

From past experience, real property - that is, shares and real estate, and not cash - will prove to be the safe haven for your investments.

In summary, we know the economic virus is coming, but - to the wise and the practical - and the faithful - we can avoid infection.

Cash is certainly not the medicine. Cash could be the problem.

Please call us if you have any concerns on (02) 9476 2200 or contact us here.

Your financial security is our concern.