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RBA Plots Steady Course as Inflation, Economic Growth on Track

Updated on
  • Recent data increased central bank’s confidence in forecasts
  • RBA reiterates that jobs, housing need ‘careful monitoring’

Australia’s central bank said moderate economic growth alongside a gradual pickup in inflation continued to support its monetary policy settings, while jobs and housing remained key concerns.

The Reserve Bank of Australia said March consumer price data had “generally increased confidence” in its forecast that core inflation would pick up to around 2 percent by 2018, in minutes of this month’s policy meeting released Tuesday in Sydney. Data in April suggested that the economy had expanded at a moderate pace in the first quarter, it said.

“The Board continued to judge that developments in the labor and housing markets warranted careful monitoring,” the bank said. “Maintaining the current accommodative stance of monetary policy would be consistent with achieving sustainable growth and the inflation target over time.”

Governor Philip Lowe and his board are largely expected to keep interest rates on hold at 1.5 percent for the rest of the year with the labor market still showing plenty of slack and amid red-hot house prices in Sydney and Melbourne. The central bank is also gauging the impact of a clampdown on lending to property investors and higher mortgage rates.

The Australian dollar edged lower, buying 74.21 U.S. cents at 12:22 p.m. in Sydney, compared with 74.30 before the report.

Inflationary pressures were coming from the higher cost of building materials and an increase in utilities prices as energy retailers pass higher wholesale gas costs onto consumers. But subdued wage gains and strong competition in the retail sector, set to become even tougher with the arrival of Inc. into the local market, were helping to keep a lid on prices.

“Although it seemed unlikely that wage growth would slow much further, wage pressures were expected to rise only gradually as the effects of structural adjustment following the mining investment and terms of trade boom, which had weighed on aggregate wage growth, continued to wane,” the RBA said.

House Prices

Growth in house prices “remained brisk” in Sydney and Melbourne, though the picture was more patchy elsewhere, the central bank said. There are signs that even the rampant east coast property markets are starting to cool: In both major cities, median house prices have fallen in each of the past four weeks in private treaty sales, according to numbers from CoreLogic.

Recent indicators of non-mining investment, including non-residential building approvals and the pipeline of non-residential construction work, remained soft, the central bank noted. Some measures of investment intentions suggested that “it could be some time before a stronger and more broadly based pickup in non-mining business investment growth occurs,” it said.

While the Chinese economy had retained momentum in early 2017, “risks around rapid housing price growth had remained a source of concern for the authorities,” the RBA said. That, in turn, was an ongoing source of uncertainty for Australian exporters.

Recent data had added to a rosier outlook for global growth, continuing the improvement seen in the economies of most of Australia’s major trading partners since mid-2016. The central bank singled out a pickup in industrial production and business and consumer sentiment, as well as a broad-based rise in global trade.

Jobs Shift

In assessing the jobs landscape, the board examined the growth in part-time work, which now makes up more than a third of employment, up from about 10 percent in the early 1970s. The shift had been caused by a range of factors, including labor market deregulation, technological change and the move to a more service-based economy.

As a result, the distinction between full-time and part-time work has become less important in assessing labor market conditions, the board concluded.

The minutes “share the optimistic tone of May’s Statement on Monetary Policy, but the more recent data releases suggest that the RBA may have to become a bit more cautious,” said Paul Dales, chief Australia and New Zealand economist at Capital Economics in Sydney.

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