Australia’s Reserve Bank holds cashrate, governor happy

The Reserve Bank of Australia left its cashrate unchanged at 1.5% yesterday.

Bank governor Philip Lowe said the bank’s board judged that “holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy & achieving the inflation target over time”.

His assessment of economic conditions:

The global economic expansion is continuing and unemployment rates in most advanced economies are low. There are, however, some signs of a slowdown in global trade, partly stemming from ongoing trade tensions.

Growth in China has slowed a little, with the authorities easing policy while continuing to pay close attention to the risks in the financial sector.

Globally, inflation remains low, although it has increased due to the earlier lift in oil prices and faster wages growth. A further pickup in core inflation is expected given the tight labour markets and, in the US, the sizeable fiscal stimulus.

Financial conditions in the advanced economies remain expansionary but have tightened somewhat. Equity prices have declined and credit spreads have moved a little higher. There has also been a broad-based appreciation of the $US this year.

In Australia, money market interest rates have declined, after increasing earlier in the year. Standard variable mortgage rates are a little higher than a few months ago and the rates charged to new borrowers for housing are generally lower than for outstanding loans.

The Australian economy is performing well. The central scenario is for gdp growth to average around 3.5% over this year & next, before slowing in 2020 due to slower growth in exports of resources. Business conditions are positive and non-mining business investment is expected to increase. Higher levels of public infrastructure investment are also supporting the economy, as is growth in resource exports.

One continuing source of uncertainty is the outlook for household consumption. Growth in household income remains low, debt levels are high and some asset prices have declined. The drought has led to difficult conditions in parts of the farm sector.

Australia’s terms of trade have increased over the past couple of years and have been stronger than earlier expected. This has helped boost national income. Most commodity prices have, however, declined recently, with oil prices falling significantly. The $A remains within the range that it has been in over the past 2 years on a trade-weighted basis.

The outlook for the labour market remains positive. The unemployment rate is 5%, the lowest in 6 years. With the economy expected to continue to grow above trend, a further reduction in the unemployment rate is likely. The vacancy rate is high and there are reports of skills shortages in some areas. The stronger labour market has led to some pickup in wages growth, which is a welcome development. The improvement in the economy should see some further lift in wages growth over time, although this is still expected to be a gradual process.

Inflation remains low & stable. Over the past year, CPI inflation was 1.9% and in underlying terms inflation was 1.75%. Inflation is expected to pick up over the next couple of years, with the pickup likely to be gradual. The central scenario is for inflation to be 2.25% in 2019 and a bit higher in the following year.

Conditions in the Sydney & Melbourne housing markets have continued to ease and nationwide measures of rent inflation remain low. Credit conditions for some borrowers are tighter than they have been for some time, with some lenders having a reduced appetite to lend. 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 to an annualised pace of 5-6%. Mortgage rates remain low, with competition strongest for borrowers of high credit quality.

The low level of interest rates is continuing to support the Australian economy. Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual.

Attribution: Bank release.

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