RBA Balanced Weaker Jobs, Strong Housing in Decision to HoldMichael Heath
Australia’s central bank balanced “considerable uncertainty” in labor market momentum and resurgent property prices in Sydney and Melbourne in its decision to leave interest rates unchanged.
The minutes of this month’s policy meeting also explicitly set out the board’s ongoing debate on the impact of its five-year easing cycle on asset prices and household debt. The record-low 1.5 percent cash rate is designed to help absorb unwinding mining investment and boost prices in the economy.
“The board has sought to balance the benefits of lower rates in supporting growth and achieving the inflation target with the potential risks to household balance sheets,” the Reserve Bank of Australia said Tuesday. “Members recognized that this balance would need to be kept under review.”
The easing of monetary policy to foster a transition to services exports from resource investment has prompted a renewed borrowing binge that’s sent household debt to a record high and property prices on the east coast to stratospheric levels. Governor Philip Lowe, who took the helm in September, has signaled a greater emphasis on financial stability and markets have since slashed bets on the chances of rates falling further.
Lowe and his board did note a brighter outlook for the world economy, while acknowledging “significant risks” remained, and an improving global inflation picture. But it was the local labor market that garnered much attention and the likelihood of an extended period of weak inflation.
The Australian dollar was little changed after the report, buying 72.55 U.S. cents at 11:34 a.m. in Sydney.
“There was still considerable uncertainty about the momentum in the labor market,” the RBA said. “Part-time employment had grown strongly over the previous year, but employment growth overall had slowed. Members noted that there was expected to be excess capacity in the labor market for some time, which was consistent with further indications of subdued labor cost pressures. This suggested inflation would remain low for some time before returning to more normal levels.”
The RBA cut rates twice this year in response to weak price pressures in the economy. It noted the contrast between weakness in the state mining capital of Perth and the strength on the other side of the country.
“In Sydney and Melbourne, housing price inflation had picked up and auction clearance rates were at high levels,” it said. “In contrast, housing market conditions had remained weak in Perth”, adding that the rental market there was “particularly weak.”
The meeting was the RBA’s first since the U.S. presidential election. The board said it was too early to know much about the effect of the outcome on the American economy and inflation or potential spillovers to other economies.
“There was uncertainty over the policy agenda of the incoming administration,” it said. The RBA noted that while fiscal stimulus from a Trump administration could boost growth and inflation, “if policies were enacted to restrict trade, there could be significant adverse effects on the economic growth of the United States and beyond.”
The RBA doesn’t meet in January. The next policy meeting is in early February.
(Updates with currency in 6th paragraph.)