RBA upbeat but cash rate stays at 1.5%

Stuart Condie
(Australian Associated Press)


Reserve Bank Governor Philip Lowe says wages growth has finally “picked up a little” as the central bank left the cash rate unchanged at 1.5 per cent for the 25th month in a row.

Dr Lowe on Tuesday again called out weak household spending as a source of uncertainty for the economy and a factor in the RBA board’s decision to leave the official interest rate at its current record low.

But he was slightly more upbeat in his commentary on the economy, noting that unemployment rate has fallen to its lowest level in almost six years, to 5.3 per cent, and is expected to further decline in the next couple of years to about five per cent.

“Wages growth remains low, although it has picked up a little recently,” Dr Lowe said.

“The improvement in the economy should see some further lift in wages growth over time, although this is likely to be a gradual process.”

Dr Lowe said that, in the first half of 2018, the economy is estimated to have grown at an above-trend rate.

“Business conditions are positive and non-mining business investment is expected to increase,” he noted.

The central bank expects headline inflation to slip to 1.75 per cent in 2018 before increasing in 2019 and 2020.

Sarah Hunter, head of macroeconomics at BIS Oxford Economics, said she doesn’t expect a “substantial” acceleration in wages growth until the second half of 2019.

“We agree with the RBA’s view that conditions are improving, but it is happening at a glacial pace, particularly for wage inflation, which has hardly moved over the last year,” she said.

“Given this, it will be quite some time before core inflation pushes up into the middle of the RBA’s target band, and we think the cash rate will be on hold until the June quarter 2020.”

Dr Lowe referred, as he did last month, to recent mortgage rate increases by Australian lenders and easing conditions in Sydney and Melbourne housing markets – although he noted the average mortgage rate paid is lower than a year ago.

The Australian dollar jumped from 71.90 US cents to 72.25 within 20 minutes of the RBA announcing its decision.

Royal Bank of Canada macro rates strategist Robert Thompson said there were very few changes to Dr Lowe’s statement, but highlighted the dropping of a reference that above trend growth “should see some further reduction in spare capacity”.

“This hints at the need for a sustained period of above trend growth to absorb slack,” Mr Thompson said.

“In an otherwise uneventful statement, this omission is noteworthy and consistent with an RBA on hold for the foreseeable future despite likely decent growth.”

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