Market Watch

Since the global financial crisis (GFC), one of the dominant patterns in global economic policy has been the search for more tools to provide stimulus in an environment where low growth and low inflation have proven extremely persistent.

Faced with the difficulty of what to do when cash rates reach the lower bound of zero, central bankers have responded with attempts to twist the yield curve; purchases of government bonds, corporate bonds and equities; direct loans into the banking system; and most recently, negative interest rates. In some countries, these moves have been accompanied by explicit requests from the central bank that governments become more active in fiscal policy.

These non-traditional policy tools reflect a degree of desperation, as the traditional tool of monetary policy – cash rates – have reached their effective limits. When a central bank reduces interest rates, it limits its ability to provide further stimulus going forward. Given there is a lower bound on the cash rate, the decision to cut rates today means one more cut that cannot be delivered in the future, should economic conditions worsen.

In effect, by using policy flexibility today, policy makers, with a finite number of ways to deliver stimulus, reduce their future flexibility to loosen policy. Policy makers have embraced quantitative easing and negative interest rates to increase the number of policy tools available and therefore generate more flexibility for the future.

Flexibility for policy makers is essential if they are to respond to further growth downturns or systemic shocks. Additionally, in an environment where central banks are often struggling to meet their inflation mandates, a perceived inability to deliver further stimulus goes to the heart of central bank credibility itself, with low inflation expectations becoming entrenched as a result.

The Policy Inflexibility Index

At AMP Capital, our belief is that a rigorous and robust investment process is the key to delivering great investor outcomes. To that end, we have developed a method of analysing economies and markets using quantitative analysis as the foundation. We are continuing that tradition by introducing our Policy Inflexibility Index, which we have developed and calculated across a range of countries. Through this Index we seek to model the degree of policy choices, available to any given country, that support growth and inflation expectations in a systematic way. The index is based on the following inputs:

• Does the (relevant) central bank still have room to cut, or has a lower bound been reached?

• Are long term yields relatively high compared to the cash rate? A steep yield curve indicates there is room to bring term yields down. This can be achieved through a variety of methods ranging from forward guidance through to asset purchasing programmes, such as quantitative easing.

• Is the currency expensive versus fair value? Lower exchange rates are stimulatory, and an expensive currency has greater potential to weaken in response to policy making.

• Has the government been running surpluses, or only small deficits? A government in this situation is more able to stimulate activity by choosing to run larger deficits for a period.

• What is the overall debt level of the government? A government with low levels of debt is likely to be able to sustain larger deficits over a longer period.

Figure 1 shows the Policy Inflexibility Indices for Australia, the EU, Japan and the United States. There are a number of notable observations:

Australia, with the highest cash rate, has not had to engage in any unconventional monetary policy and has the most favourable starting point from a fiscal point of view. Consequently, Australia has considerably more policy flexibility than the other countries. However, the extended easing cycle by the RBA has had some impact in limiting future choices for further stimulus.

The US has significantly more policy flexibility than either Europe or Japan. This is partly due to having commenced a hiking cycle. What has been more impactful in terms of future flexibility has been the substantial rise in the value of the USD; while this has a tightening impact on policy now, the rally provides scope for a more substantial decline should growth expectations falter. Additionally, the US fiscal position has substantially improved since the large deficits that were run following the collapse of Lehman Brothers, providing greater scope for additional fiscal spending in the future, if needed.

Although Europe and Japan face similar overall constraints with policy flexibility, the underlying reasons are different. Both have low cash rates and relatively flat yield curves owing to extensive asset purchase programs. However, in the case of Japan, the Yen remains more expensive against valuation models, allowing greater potential for future weakness. For Europe, the overall fiscal position of the Eurozone is somewhat more positive, allowing for further stimulus from government spending.

Applications and Limitations

It remains to be seen whether new policy tools will be found. Policy makers have been remarkably inventive in finding new approaches to deliver easing in the years since the GFC. Had this index been constructed prior to that period, we would not have considered the need to factor in the potential for quantitative easing. It is likely that the index will need to be expanded in the future to handle further developments in unconventional policy.

Additionally, understanding whether a country has room to move on policy is not the same as determining whether it will choose to do so. For example:

The European fiscal situation, in aggregate, is strengthened by fiscal stance of Germany, where low deficits and debt levels act to improve the score of the Eurozone as a whole. While the index seeks to capture the capacity of policy makers to influence the cycle, it does not capture their willingness to do so. This is exemplified by the reluctance of Germany to run budget deficits, despite low growth and inflation; which has hindered the recovery of the Eurozone. Similarly, while Australia’s relative positive fiscal position allows for future stimulus, if there is a lack of political will to run larger budget deficits in an environment of deteriorating growth, the policy flexibility will remain unused. Nonetheless, the potential for further stimulus is paramount for policy makers seeking to maintain their inflation credibility.

Finally, all these measures are somewhat subjective. The true lower bound for effective cash rates is likely to be determined in hindsight. While it is likely that a currency that is expensive against fundamentals is more likely to fall, this may not occur, despite the will of policy makers.

All that said, a country that has exhausted its policy tools finds itself in a difficult position. In such a scenario, policy makers are likely to be confronted by substantial challenges in smoothing out the growth cycle and maintaining inflation expectations. It seems clear that despite policy makers’ claims, both Japan and the Eurozone are close to the limits of what can be achieved through existing methods. Assets in countries with low levels of policy flexibility should have higher risk premiums in order to compensate for increased tail risk.

Authors: Ilan Dekell, Head of Macro & Andrew Scott, Senior Portfolio Manager, Macro

Source: AMP Capital 10 Jan 2017

Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided. AMP Capital Funds Management Limited (AMP Capital) is the responsible entity of the AMP Capital Sustainable Australian Equity Fund and the issuer of the units in the Fund. To invest in this Fund, investors will need to obtain the current Product Disclosure Statement (PDS) from AMP Capital Investors Limited. The PDS contains important information about investing in the Fund and it is important that investors read the PDS before making a decision about whether to acquire, or continue to hold or dispose of units in the Fund. Neither AMP Capital, nor any other company in the AMP Group guarantees the repayment of capital or the performance of any product or any particular rate of return referred to in this document. Past performance is not a reliable indicator of future performance.

Advisers who moved their clients into listed real estate after the GFC made a brave call, given that investors in the sector suffered terribly during the economic turmoil.

However, in the last five years, those clients who were invested in the listed real estate sector have benefited from strong total returns. Notably, global listed real estate has outperformed the majority of other asset classes for eleven of the last 15 years and has significantly outperformed global equities since the height of the GFC in March 2009.

The economic recovery following the Global Financial Crisis (GFC) naturally boosted demand for real estate, whilst at the same time, the reluctance of banks to fund speculative development has generally kept new supply in check. This demand/supply dynamic helped to drive capital growth. Meanwhile, regular rental income which supports the yield component of global listed real estate has proven to be attractive for investors, particularly against the backdrop of very low interest rates.

And yet, if global listed real estate is indeed correlated to the performance of the global economy, conventional wisdom would suggest that it should underperform in the event that the bear case of a global economic slowdown does come to pass – as the sector did during the Financial Crisis.

We therefore think it is timely for advisers to perform a stress test on global listed real estate and to reassess the resilience of the sector as an investment class should an economic slowdown materialise.

Has the sector learned from its previous painful mistakes?

We believe that the sector is much better prepared and has heeded the bitter lessons learnt during the last global economic slowdown.

There are four key factors that support the notion that global listed real estate offers resilience.

1. Financial leverage is much more disciplined

Leverage was clearly a significant factor in the relative underperformance of listed real estate during the GFC. In many cases, real estate companies were over-levered and exposed to an economic downturn.

At the start of 2008, US REITs had an average leverage ratio of around 60 per cent. Debt to EBITDA multiples were around 7.5 times, rising to 8 times in late 2008 to 2009.

When debt markets effectively closed during the GFC, many listed real estate companies were close to breaching debt covenants and faced difficulty refinancing near-term debt. They were forced to either raise equity at deep discounts or offload assets.

In contrast, the average leverage ratio of US REITs today is around 30 per cent – roughly half what it was at the peak of the GFC. The debt to EBITDA multiple has also been cut by 25 per cent, falling from around 8 during the GFC to 6 today.

We believe that leverage is likely to stay in check or even trend lower as asset values continue to grow and companies sell into a very strong capital market.

This all suggests that the sector is much better positioned with respect to leverage and would be unlikely to suffer the same level of distress as previously experienced during the GFC.

A recent example supports this thesis – in the immediate aftermath following the UK’s decision to leave the European Union in June 2016, the UK REITs declined by around 20% per cent. However, once it became clear that the REITs would not necessarily be forced sellers of assets nor be forced to raise equity, most of those losses were regained.

2. Reduction in development risk

The magnitude of development exposure (or risk) on the balance sheets of listed real estate companies is also lower today than prior to the GFC. In addition, the nature of this exposure has changed with a reduction in the higher risk, so-called “speculative” development component of the overall development book.

Since the depths of the GFC, banks have been less willing to lend for development, particularly speculative development. That has had the effect of holding the supply of global real estate in check. Whilst supply is expected to pick up over the medium term, it is from a relatively low base and considerably below the long-term average.

3. Payout ratio headroom

The third factor underscoring the defensive positioning of global listed real estate today is that of payout ratios. Prior to the GFC, payout ratios in the US were around 85 per cent. In contrast, the present payout ratios in the US are at near historic lows of around 72 per cent.

This is important for two reasons. Firstly, a lower payout ratio reflects a greater focus on financial discipline including strengthened balance sheets and cutting the heavy reliance on debt to finance acquisitions and capital expenditures.

Secondly, headroom in the payout ratio also suggests that current dividend yields are sustainable, and that listed real estate is in a healthier position than has been the case in the past, particularly in the lead up to the GFC.

4. A new pillar of demand with the emergence of sovereign wealth funds

Sovereign wealth funds are playing an increasingly important role in global real estate.

The representation of sovereign wealth funds in global commercial real estate transactions has grown from less than 1 per cent in 2011 to 6 per cent in 2015. The proportion of the funds investing in the asset class has increased by almost 10 per cent in the past two years alone, a trend likely to continue given that on average, these funds remain underinvested relative to strategic targets.

Sovereign wealth funds are long-term oriented, patient capital, and most importantly, are driven by equity rather than debt. The mandates of these funds often restrict the use of leverage and as a result, these investors are relatively insulated from the type of stress in credit markets that exacerbated the fall in real estate values during the GFC.

Meeting expectations

In the event of a global economic slowdown, listed real estate companies will not be completely immune. However, we believe that the sector has taken important steps to insulate itself to a far higher degree compared to the period prior to the GFC. This is manifest is greater financial discipline, less speculative development, more headroom in payout ratios, and new pillars of long term demand for real estate from sovereign wealth funds.

The end result is an investment class that is positioned to deliver what is expected of it: real estate-like returns over the long term, with the benefit of both liquidity and diversification.

Advisers should gain confidence from this scenario.

Author: Jamie O’Donnell, Portfolio Manager / Analyst, Global Listed Real Estate

Source: AMP Capital 10 Jan 2017

Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.

At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.

The global economy is continuing to grow, at a lower than average pace. Labour market conditions in the advanced economies have improved over the past year. Economic conditions in China have steadied, supported by growth in infrastructure and property construction, although medium-term risks to growth remain. Inflation remains below most central banks’ targets, although headline inflation rates have increased recently. Globally, the outlook for inflation is more balanced than it has been for some time.

Commodity prices have risen over the course of this year, reflecting both stronger demand and cut-backs in supply in some countries. The higher commodity prices have supported a rise in Australia’s terms of trade, although they remain much lower than they have been in recent years. The higher prices are providing a boost to national income.

Financial markets are functioning effectively. Government bond yields have risen further with the adjustment having been orderly. Funding costs for some borrowers have also risen, but remain low. Globally, monetary policy remains remarkably accommodative.

In Australia, the economy is continuing its transition following the mining investment boom. Some slowing in the year-ended growth rate is likely, before it picks up again. Further increases in exports of resources are expected as completed projects come on line. The outlook for business investment remains subdued, although measures of business sentiment remain above average.

Labour market indicators continue to be somewhat mixed. The unemployment rate has declined this year, although some measures of labour underutilisation are little changed. There continues to be considerable variation in employment outcomes across the country. Part-time employment has been growing strongly, but employment growth overall has slowed. The forward-looking indicators point to continued expansion in employment in the near term.

Inflation remains quite low. The continuing subdued growth in labour costs means that inflation is expected to remain low for some time, before returning to more normal levels.

Low interest rates have been supporting domestic demand and the lower exchange rate since 2013 has been helping the traded sector. Financial institutions are in a position to lend for worthwhile purposes. These factors are assisting the economy to make the necessary adjustments, though an appreciating exchange rate could complicate this.

Conditions in the housing market have strengthened overall, although they vary considerably around the country. In some markets, prices are rising briskly, while in others they are declining. Housing credit has picked up a little, although turnover of established dwellings is lower than it was a year ago. Supervisory measures have strengthened lending standards and some lenders are taking a more cautious attitude to lending in certain segments. Considerable supply of apartments is scheduled to come on stream over the next couple of years, particularly in the eastern capital cities. Growth in rents is the slowest for some decades.

Taking account of the available information, and having eased monetary policy earlier in the year, the Board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.

Enquiries

While the high inflation of the 1970s and early 1980s was bad for investment returns at the time, it left a legacy of very high investment yields which helped set the scene for high investment returns through the 1980s and 1990s. Back in the early 1980s the RBA’s ‘cash rate’ was averaging around 14%, three-year bank term deposit rates were around 12%, 10-year bond yields were around 13.5%, commercial and residential property yields were running around 8-9% and dividend yields on shares were around 6.5% in Australia and 5% globally. Such yields meant investments were already providing very high cash income. So for assets like property or shares only modest capital growth was necessary to give decent returns. As a result, during this period the medium term (5-10 year) return potential from investing was solid. In fact, most assets had very strong returns in the 1980s and 1990s. Australian superannuation funds saw returns average 14.1% p.a. in nominal terms and 9.4% p.a. in real terms between 1982 and 1999 (after taxes and fees).

Figure 1: Balanced/growth superannuation fund returns

Source: Mercer Investment Consulting, Morningstar, AMP Capital

Since the early 1980s, the starting point in terms of investment yields has been moving progressively lower, resulting in slowing 10-year average nominal and real returns for superannuation funds – this is shown in figure 1. Today, the Reserve Bank of Australia’s cash rate is just 1.5%, three-year bank term deposit rates are just 2.6-3%, 10-year bond yields are just 1.9%, gross residential property yields are around 3% and while dividend yields are still around 6% for Australian shares (with franking credits) they are around 2.5% for global shares.

Projections for medium term returns

Figure 2 presents our projections for medium-term returns across a range of asset classes. Combining the return projections for each asset indicates that the implied return for a diversified growth mix of assets has now fallen to 6.9% p.a.

Several themes are allowed for in our projections: slower growth in household debt; the backlash against economic rationalist policies of globalisation, deregulation and small government; rising geopolitical tensions; aging and slowing populations; low commodity prices; technological innovation and automation; the Asian ascendancy and China’s growing middleclass; rising environmental awareness; and the energy revolution. Most of these are constraining nominal growth and hence investor returns. However, technological innovation is positive for profits may lead to inflation bottoming.

Figure 2: Medium-term (5-7 years) return forecasts

# Current dividend yield for shares, distribution/net rental yields for property and five-year bond yields for bonds. * The Australian dividend yield is net/grossed-up for franking credits
^ Columns may not add precisely to the total due to rounding
Source: AMP Capital

Some assumptions

• We assume central banks average around or just below their inflation targets, that is, 2.5% in Australia and 2% in the US.

• For Australia we have adopted a relatively conservative growth assumption below nominal GDP growth potential. This reflects the headwind from weak commodity prices and the impact of this on resource sector profits and sales growth.

• We allow for forward points in the return projections for global assets based around current market pricing – which adds 1.8% to the return from world equities.

• The Australian cash rate is assumed to average 2.75% over the medium term. Cash is one asset where the current yield is of no value in assessing the asset’s medium-term return potential because the maturity is so short. As such, we assume a medium-term average. Normally for cash this would be close to a country’s potential nominal growth rate. We have adjusted for higher-than-normal bank lending rates relative to the cash rate and higher household debt-to-income ratios which lowers the neutral cash rate.

In figure 3, we show the projected return for a diversified growth mix of assets. It’s important to note that the medium-term return potential continues to soften largely reflecting the rally in most assets of the last few years. This has pushed investment yields lower. Projected returns for a diversified growth mix of assets has fallen from 10.3% pa at the low point of the Global Financial Crisis in March 2009 to 6.9% now.

Figure 3: Projected medium-term returns for a diversified growth mix of assets, %pa, pre fees & taxes

Source: AMP Capital

Key takeaways

• The starting point for returns today is far less favourable than when the last secular bull market in shares and bonds started in 1982, due to much lower yields.

• Government bonds offer low return potential thanks to low bond yields.

• Unlisted commercial property and infrastructure continue to come out well, reflecting their relatively high yields.

• Australian shares stack up well on the basis of yield, but it’s still hard to beat Asian shares for growth potential.

• The downside risks to our medium term return projections are referred to endlessly by financial commentators: namely that the world is plunged into another recession or that investment yields are pushed up to more normal levels causing large capital losses. The upside risks are (always) less obvious but could occur if global growth improves but inflation remains low which could see a continuing search for yield further pushing up capital values.

Implications for investors

There are several implications for investors. First, have reasonable return expectations. The combination of low investment yields and constrained GDP growth indicate it’s not reasonable to expect sustained double-digit returns. In fact, the decline in the rolling 10-year moving average of superannuation fund returns depicted in figure 1 indicates we have been in a lower return world for many years. Second, allow that this partly reflects very low inflation. Real returns haven’t fallen as much and are still reasonable. Third, a dynamic approach to asset allocation may be a way to enhance returns when the return potential from investment markets is constrained. This is likely to be enhanced by continued bouts of volatility. Finally, it’s important to focus on assets providing decent sustainable income as they provide confidence regarding future returns.

Source: AMP Capital

Authors

Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital is responsible for AMP Capital’s diversified investment funds. He also provides economic forecasts and analysis of key variables and issues affecting, or likely to affect, all asset markets.

Diana Mousina
Economist

Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.

The United States (US) presidential election, on 8 November, between Republican candidate Donald Trump and Democratic candidate Hillary Clinton is a hotly contested race. More recently, we have seen some widening of opinion polls, however, this is a fluid and fast moving landscape and political uncertainty remains. We anticipate that the potential for increased market volatility over coming weeks is high.

This paper draws on the insights of AMP Capital’s investment teams to assess the risks and opportunities for individual asset classes from both possible outcomes, based on known policies. We accept that the details of some policies are not clear, and may not be clear for some time, particularly given that control of the two houses of Congress, as always, will be a key factor in determining which elements of a candidate’s policy platform ultimately becomes law.

Key points

• Policy differences will have some specific asset class impacts. In general, however, the perception is that a Clinton victory represents continuation of the Democratic party status quo, and associated with this is the expectation of fewer policy surprises. The change to a Republican administration under Trump has the potential to result in more dramatic shifts in intended policies. Once again, the ability of either party to implement policy will be dependent on Congress.

• US bond markets could weaken on a Trump victory, reflecting an expected increase in the budget deficit and allow the Fed to assume a more aggressive rate hike path than currently. This has the potential to push the USD higher. A Clinton victory is unlikely to point to a different path for interest rates than is currently priced into the market.

• Both candidates seek to increase infrastructure spending, which is one of the few areas of spending agreement. For US listed infrastructure, particularly the energy and pipeline sector, neither of the candidates have plans that would be detrimental. A Trump victory may spark short-term share price gains.

• For direct infrastructure, a key area to monitor is the view of each candidate on the use of private capital to fund the nation’s infrastructure development. However, this is currently unclear. Irrespective of the election outcome we don’t envisage any immediate changes to our deal flow or opportunity base.

• In general a Clinton victory, assuming a Republican-controlled Congress, would likely result in more of a status-quo environment for US REITs. A Trump victory could see some sectors doing better, such as the office sector. Regardless of who wins, defence spending is almost certain to increase.

• Historically, elections have been meaningful drivers of equity volatility. Looking back at all post-war elections (1948-2012), realised volatility is highest in October of an election year than any other month during election season (Jul-Nov). If history is our guide, increased volatility that causes increased trading volumes will likely precede the election rather than follow it. We do not foresee a lasting impact on liquidity of either the equity or fixed income markets as a result of the US election.

Read the full report here

Source: AMP Capital

Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.

At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.

The global economy is continuing to grow, at a lower than average pace. Labour market conditions in the advanced economies have improved over the past year, but growth in global industrial production and trade remains subdued. Economic conditions in China have steadied recently, supported by growth in infrastructure and property construction, although medium-term risks to growth remain. Inflation remains below most central banks’ targets.

Commodity prices have risen over recent months, following the very substantial declines over the past few years. The higher commodity prices have supported a rise in Australia’s terms of trade, although they remain much lower than they have been in recent years.

Financial markets are functioning effectively. Funding costs for high-quality borrowers remain low and, globally, monetary policy remains remarkably accommodative. Government bond yields have risen, but are still low by historical standards.

In Australia, the economy is growing at a moderate rate. The large decline in mining investment is being offset by growth in other areas, including residential construction, public demand and exports. Household consumption has been growing at a reasonable pace, but appears to have slowed a little recently. Measures of household and business sentiment remain above average.

Labour market indicators continue to be somewhat mixed. The unemployment rate has declined this year, although there is considerable variation in employment growth across the country. Part-time employment has been growing strongly, but employment growth overall has slowed. The forward-looking indicators point to continued expansion in employment in the near term.

Inflation remains quite low. The September quarter inflation data were broadly as expected, with underlying inflation continuing to run at around 1½ per cent. Subdued growth in labour costs and very low cost pressures elsewhere in the world mean that inflation is expected to remain low for some time.

Low interest rates have been supporting domestic demand and the lower exchange rate since 2013 has been helping the traded sector. Financial institutions are in a position to lend for worthwhile purposes. These factors are assisting the economy to make the necessary adjustments, though an appreciating exchange rate could complicate this.

The Bank’s forecasts for output growth and inflation are little changed from those of three months ago. Over the next year, the economy is forecast to grow at close to its potential rate, before gradually strengthening. Inflation is expected to pick up gradually over the next two years.

In the housing market, supervisory measures have strengthened lending standards and some lenders are taking a more cautious attitude to lending in certain segments. Turnover in the housing market and growth in lending for housing have slowed over the past year. The rate of increase in housing prices is also lower than it was a year ago, although prices in some markets have been rising briskly over the past few months. Considerable supply of apartments is scheduled to come on stream over the next couple of years, particularly in the eastern capital cities. Growth in rents is the slowest for some decades.

Taking account of the available information, and having eased monetary policy at its May and August meetings, the Board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.