The Reserve Bank of Australia’s board decided yesterday to leave its cashrate unchanged at 1.5%.
That’s understandable, although Australia has been undergoing more severe economic strain than New Zealand recently, especially in its residential development sectors.
Like all central bankers, the Australian Reserve Bank’s governor, Philip Lowe, went through the international state of play and noted local conditions without emphasising any particular predicament.
What his statement below emphasises, for me, is that the limited tools central bankers have are not adequate to provide nuanced direction – and neither those bankers nor their governments have any great ideas on how to improve their influence (that’s improve, not increase) to help generate a more vibrant economy.
In the final segment of his statement, Dr Lowe made a point about the residential sector which hasn’t generally been part of the media narrative across the Tasman, where media have concentrated on a market price slump getting close to 20% over the last 2 years. Dr Lowe’s reminder was that the slump has followed an upward spiral in prices.
The governor’s statement:
“The outlook for the global economy remains reasonable, although growth has slowed and downside risks have increased. Growth in international trade has declined and investment intentions have softened in a number of countries. In China, the authorities have taken steps to ease financing conditions, partly in response to slower growth in the economy. Globally, headline inflation rates have moved lower following the earlier decline in oil prices, although core inflation has picked up in a number of economies. In most advanced economies, unemployment rates are low and wages growth has picked up.
“Global financial conditions remain accommodative and have eased recently. Long-term bond yields have declined further, consistent with the subdued outlook for inflation and lower expectations for future policy rates in a number of advanced economies. Across a range of markets, risk premiums remain low. Equity markets have also risen and are being supported by growth in corporate earnings.
The Australian scenario
“In Australia, long-term bond yields have fallen to historically low levels and short-term bank funding costs have moderated further. The $A has remained within its narrow range of recent times. While the terms of trade have increased over the past couple of years, they are expected to decline over time.
“The Australian labour market remains strong. There has been a significant increase in employment and the unemployment rate is at 4.9%. The vacancy rate remains high and there are reports of skills shortages in some areas. The stronger labour market has led to some pick-up in wages growth, which is a welcome development. Continued improvement in the labour market is expected to see some further lift in wages growth over time, although this is still expected to be a gradual process.
“The GDP data paint a softer picture of the economy than do the labour market data. GDP rose by just 0.2% in the December quarter to be 2.3% higher over 2018. Growth in household consumption is being affected by the protracted period of weakness in real household disposable income & the adjustment in housing markets. The drought in parts of the country has also affected farm output. Offsetting these factors, higher levels of spending on public infrastructure & an upswing in private investment are supporting the growth outlook, as is the steady growth in employment.
“The adjustment in established housing markets is continuing, after the earlier large run-up in prices in some cities. Conditions remain soft and rent inflation remains low. Credit conditions for some borrowers have tightened a little further over the past year or so. At the same time, the demand for credit by investors in the housing market has slowed noticeably as the dynamics of the housing market have changed. Growth in credit extended to owner-occupiers has eased. Mortgage rates remain low and there is strong competition for borrowers of high credit quality.
“Inflation remains low & stable. Underlying inflation is expected to pick up gradually over the next couple of years, although this has been taking a little longer than earlier expected. The central scenario is for underlying inflation to be 2% this year & 2¼% in 2020. In the near term, headline inflation is expected to decline because of lower petrol prices earlier in the year, while underlying inflation is expected to remain broadly stable.
“The low level of interest rates is continuing to support the Australian economy. Further progress in reducing unemployment & having inflation return to target is expected, although this progress is likely to be gradual. Taking account of the available information, the board judged that it was appropriate to hold the stance of policy unchanged at this meeting. The board will continue to monitor developments & set monetary policy to support sustainable growth in the economy & achieve the inflation target over time.”
Attribution: Bank release.