Photographer: Brendon Thorne/Bloomberg

Australia’s Central Bank Reaffirms Growth Is Set to ‘Increase Gradually’

Updated on
  • Global rate rises have no ‘mechanical implications’: RBA
  • Central bank comments in minutes of October rate meeting

The Reserve Bank of Australia says economic conditions at home and abroad “had been more positive since 2016,” according to minutes of this month’s policy meeting where interest rates were left unchanged.

Main Takeaways

  • National accounts indicated private non-mining business investment increased in the June quarter to be almost 10% higher than at the start of 2016
  • Public consumption had “increased solidly” and new public investment had risen “very strongly” across most states
  • Retail electricity prices expected to “increase significantly” in September quarter and business liaison suggested a number of firms were largely absorbing increases in energy costs into margins rather than passing them through to final prices
  • Residential construction appeared to have plateaued, with dwelling investment largely unchanged in the June quarter. The pipeline of work already approved or underway was expected to continue supporting dwelling investment around current levels over the subsequent year or so
  • Australian dollar bought 78.39 U.S. cents at 11:35 a.m. in Sydney, from 78.45 cents before report

State of Play

The RBA is maintaining its patient course on policy as the economy is predicted to gradually strengthen and generate increasing numbers of jobs that eventually tighten the labor market, lifting wages and inflation. The conundrum is in the U.S. and elsewhere: rapid economic growth and job markets well below traditional full employment are failing to produce either. Meanwhile, policy makers are keeping a watchful eye on debt- laden domestic households struggling with limited income growth and the threat that poses to consumption.

Key Quotes

  • “The increase in GDP growth in the June quarter confirmed that some of the weakness in the previous quarter had been temporary and was consistent with expectations that growth would increase gradually over the coming year, supported by the current stance of monetary policy.”
  • “Moves towards higher interest rates in other economies were a welcome development, but did not have mechanical implications for the setting of policy in Australia, where the timing of any changes in interest rates would be dependent, as always, on developments in domestic economic conditions.”
  • “The current and prospective strength in employment growth in Australia was expected to support household spending in the period ahead, although slow growth in real wages and high levels of household debt were likely to be constraining influences.”
  • “A material further appreciation of the exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.”

The Backdrop

The board has kept its key interest rate unchanged at a record- low 1.5 percent for 14 months to support investment and expansion by firms outside the mining industry -- while harnessing loan curbs to check asset bubbles from forming due to cheap cash. The economy has generated solid job numbers this year -- predominantly full-time -- which is positive, but slack remains in the labor market and as a result there’s tepid wage growth and inflation. Traders are pricing in little chance of a rate hike until the second half of next year.

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