Monetary Policy and Recent Economic Developments

August 2014Teacher and Student Guide

Reserve Bank of Australia

Responsible for:•Monetary policy and market operations

•Payments system stability & efficiency

•Financial system stability

•Issuing Australia’s currency notes

•Banker to the government

•Managing foreign exchange reserves

The objectives specified in the Reserve Bank Act (1959) are:

•Stability of the currency

•Maintenance of full employment

•Economic prosperity and welfare of the people of Australia

Reserve Bank Board

•Responsible for monetary and banking policy

•Nine members: Governor, Deputy Governor, Secretary to the Treasury, and six external members

•Meets first Tuesday, except January

How the RBA achieves its objectives

• Inflation targeting regime since 1993, agreed with the government since 1996, and which was most recently updated in 2013

• Objective is to keep annual inflation between 2 and 3 per cent, on average, over the cycle

• CPI inflation is the target, but underlying measures – which abstract from temporary large price increases and decreases – help show future trends in ‘headline’ inflation

• RBA sets the policy interest rate (termed the cash rate – the rate banks charge each other for overnight funds)

• The RBA uses liquidity operations (altering the supply of overnight funds) to ensure the cash rate remains at target

• Changes in the cash rate affect private mortgage and other lending and deposit rates that, along with any exchange rate response, affect the amount of private consumption and investment spending

• Inflation will remain steady and low when total spending is kept close to the level of potential output over time

R BA forecast

20092003199719911985 2015-2

0

2

4

6

%

-2

0

2

4

6

%

Australia’s Trading Partner Growth*Year-average

* Aggregated using tota l export shares

Sources: ABS; CEIC Data; RBA; Thom son Reuters

United States – GDP and Private DemandG D P grow thG D P grow th

20092004 2014-8

-4

0

4

%

-8

-4

0

4

%

Year-ended

Q uarterly

P rivate dem and grow thPrivate dem and grow th

20092004 2014-8

-4

0

4

%

-8

-4

0

4

%

Sources : R BA ; Thom son R euters

United States – Labour MarketC hange in non-farm payro llsC hange in non-farm payro lls

2010 2014-900

-600

-300

0

300

600

’000

-900

-600

-300

0

300

600

’000

13-m onth centredm oving average

6-m onthaverage

U nem ploym ent rate

2010 20143.5

5.0

6.5

8.0

9.5

11.0

%

Source : Thom son R euters

Japan – Consumption and Investment2010 average = 100

C onsum ption

20102006 201492

96

100

104

108

index

N ational accounts

Syntheticconsum ption

Business investm ent

20102006 201460

80

100

120

140

index

C ore dom esticm achinery

orders

Sources: C EIC D ata; R BA; Thom son R euters

Euro Area – Unem ploym ent Rates

20102006 20140

10

20

%

Euro area

G erm any

France

N etherlands

20102006 20140

10

20

%

Spain

Ita ly

Portugal

G reece

Ire land

Source : Thom son R euters

China – Activity IndicatorsYear-ended grow th

Industria l production

10

15

20

%

Fixed asset investm ent

20102006 201410

20

30

% R etail sa les

2010 20140

10

20

%

R eal

N om inal

* R BA estim ates prior to the D ecem ber quarter 2010

Sources: C EIC D ata; R BA

China – Merchandise Trade*Q uarterly

Volum e2005 average = 100

20102006 201450

100

150

200

250

index

Im ports

Exports

Iron ore im ports

20102006 20140

50

100

150

200

M t

From Austra lia

Total

* Seasonally ad justed by R BA

Sources: C E IC D ata ; R BA

2012201020082006 20140

50

100

150

200

250

U S$/t

0

150

300

450

600

750

U S$/t

Steel, Iron Ore and Coking Coal PricesSpot prices

C hinese steel*

Iron ore**

(R H S)

(LH S)

(R H S)

H ard coking coal**

* Average of hot ro lled stee l sheet and stee l rebar prices

** Free on board basis

Sources: B loom berg ; C itigroup ; IH S Energy Publish ing ; M acquarie Bank; R BA

2006199619861976 201640

60

80

100

index

40

60

80

100

index

Terms of Trade2011/12 average = 100

Forecast

Sources: ABS ; R BA

200920041999199419891984 201450

100

150

200

index,yen

0.30

0.60

0.90

1.20

U S$,euro

Australian DollarM onth average

(R H S)

Yen per A$

U S$ per A$

(R H S)

(LH S)

TW I**(LH S)

Euro per A$*

* D eutsche M ark spliced to euro before 1999

** Post-float average = 100

Sources: B loom berg ; R BA; Thom son R euters

2010200620021998 2014-2

0

2

4

6

%

-2

0

2

4

6

%GDP Growth

Total

Q uarterly

(year-ended)

(year-ended)

Excluding resource exports

Sources: ABS; R BA

Export Volumes*Q uarterly

20092004 20140

10

20

$b

Iron ore

C oal

LN G

20092004 20140

10

20

$b

O ther resources

Services

R ural M anufacturing

* 2011/12 prices

Sources: ABS ; BR EE ; R BA

Measures of Private Business InvestmentNominal

0

30

60

90

120

150

0

30

60

90

120

150

14/15

$b Mining Non-mining $b

02/0314/1508/09

Estimates**

08/0902/03

National accounts*Capex survey

* Adjusted for second-hand asset transfers between the private and othersectors; excluding cultivated biological resources

** Estimates are firms’ expected capital expenditure, adjusted for the pastaverage difference between expected and realised spending

*** Error bands are based on the root mean square error of each adjustedestimate compared with the final outcome for investment in each year

Sources: ABS; RBA

Upper and lowererror bands***

11 / 1205 / 0699 / 0093 / 9487 / 8881 / 82 17 / 18-6

-4

-2

0

2

%

-6

-4

-2

0

2

%

Consolidated Budget Balance*Underlying cash balance, per cent of G DP

Forw ard estim ates

RBA grant

* C om bined Austra lian G overnm ent, sta te and territory budget balancesbased on 2014/15 budgets or m id-year review s as availab le ; 2013/14rem ains an estim ate

Sources: Austra lian Treasury; S tate and Territory Treasuries

2011200820052002 20140

3

6

9

12

15

’000

0

3

6

9

12

15

’000

Private Dwelling ApprovalsM onthly

Private detached houses

Tota l*

P rivate higher-density housing*

* Sm oothed lines are ABS trend m easures

Source: ABS

Sydney M elbourne Brisbane Perth Adela ide Austra lia-6

0

6

12

18

%

-6

0

6

12

18

%

Housing Price GrowthAnnualised

2014 to date*

2013:H 2

* D ata are to July

Sources : R BA ; R P D ata-R ism ark

Consumption IndicatorsR etail sa les grow th

Volum eR etail sa les grow th

Volum e

2012201020082006 2014

0

3

6

%

0

3

6

%

Year-ended

Q uarterly

M otor vehicle sales to households*M onthly

2012201020082006 201430

35

40

45

50

’000

30

35

40

45

50

’000

* Seasonally ad justed by the R BA

Sources: ABS ; FC AI/VFAC TS ; R BA

-1 0 1 2 3 ppt

Tax paid andother expenses

Interest paid

O ther incom e

Socia l benefitsreceived

Labour incom e

D isposable incom e(tota l)

Real Household Disposable Income*C ontribution to year-ended grow th

Year to M arch 2014

D ecade average

l l l

* H ousehold sector includes unincorporated enterprises

Sources: ABS ; R BA

Consumer and Business SentimentC onsum er sentim ent

80

100

120

index

80

100

120

index

AN Z-R oy M organ*W estpac and M elbourne Institu te

Business confidenceN et balance, deviation from average since 1989

2012201020082006 2014-40

-20

0

20

index

-40

-20

0

20

index

N AB

* R escaled to have the sam e average as the W -M I index since 1996

Sources: AN Z-R oy M organ; N AB; W estpac and M elbourne Institu te

Private Non-residential Building ConstructionBuild ing approvals

2

4

$b

2

4

$b

Trend*

W ork yet to be donePer cent of G DP

20122010200820062004 20142

4

6

%

2

4

6

%

Excluding health

* 13-period H enderson trend

Sources: ABS ; R BA

Labour Market*

0

1

2

%

0

1

2

%Six-m onth-ended em ploym ent grow th

4

5

6%

4

5

6%

U nem ploym ent rate

201220102008 201464.5

65.0

65.5

%

64.5

65.0

65.5

%

Partic ipation rate

* Sm oothed lines are 13-period H enderson trends

Sources: ABS; R BA

Non-resourceeconom y

Resourceextraction*

Resource-re latedactiv ity**

0

100

200

300

hours

0

100

200

300

hours

Labour Requirem ent of OutputW eekly hours per $m of real G VA in 2012/13

* Includes m inera l and gas extraction , and resource-specificm anufacturing

** Includes investm ent that supports fu ture production of resources asw ell as the provis ion of in term ediate inputs used in the currentproduction of resources

Sources: ABS; R BA

Employment GrowthSem i-annual average , cum ulative change since 2009

2011 2014-200

0

200

400

’000

H ousehold services

M in ing

C onstruction

2011 2014-200

0

200

400

’000

Business services

Public

M anufacturing

O ther*

* Includes agricu lture, forestry & fish ing; e lectric ity, gas, water & wasteservices; reta il trade; transport, posta l & warehousing; and wholesaletrade

Source: ABS

2012201020082006 20142

3

4

5

6

%

2

3

4

5

6

%W age Growth and Unemployment

W age price index

U nem ploym ent ra te

(year-ended grow th)

(quarter average)

Sources: ABS; RBA

2009200419991994 201460

80

100

index

60

80

100

index

Labour Productivity*2009/10 = 100, log scale

Tota l

Excluding m ining and utilities

2.2% pa

2.1% pa

0.9% pa

1.0% pa1.6% pa

2.0% pa

* F igures represent trend grow th during the period show n

Sources: ABS; R BA

2011200820052002 2014-1

0

1

2

3

4

5

%

-1

0

1

2

3

4

5

%Consumer Price Inflation

Year-ended

Q uarterly

Sources: ABS; R BA

2011200820052002 20140

1

2

3

4

5

%

0

1

2

3

4

5

%Measures of Underlying Inflation

W eighted m edian

Exclusion-based*

Trim m ed m ean

(quarterly )Trim m ed m ean

* Excludes fru it, vegetab les, autom otive fue l (and deposit & loanfacilities to June quarter 2011)

Sources: ABS ; R BA

Tradables and Non-tradables Inflation

* Exc luding volatile item s (f ru it, vegetables and au tom otive fuel)and tobacco

** Exc luding depos it & loan fac ilities to June quarter 2011

Sources : ABS ; R BA

20102006200219981994 20140

2

4

6

%

0

2

4

6

%Australian Cash Rate

Source: R BA

20152014201320122011 20161

2

3

%

1

2

3

%

Trimmed Mean Inflation Forecast*Year-ended

70 per cent interval

90 per cent interval

* C onfidence in terva ls re flect R BA forecast errors since 1993

Sources: ABS; R BA

20152014201320122011 20160

1

2

3

4

5

%

0

1

2

3

4

5

%

GDP Growth Forecast*Year-ended

90 per cent in terval

70 per cent in terval

* C onfidence in terva ls re flect R BA forecast errors since 1993

Sources: ABS; R BA

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