Photographer: Brendon Thorne/Bloomberg

RBA Sees Solid Growth, Slow Inflation as Cash Rate Stays on Hold

Updated on
  • Central bank says underlying CPI will only reach 2% in 2019
  • GDP growth to average about 3% over next couple of years

Australia’s central bank used its Statement on Monetary Policy to flesh out its consistent recent view of accelerating growth and sluggish inflation, suggesting interest rates will stay at a record-low 1.5 percent.

See the RBA’s revised growth and inflation forecasts here.

Main Takeaways

  • Underlying inflation forecasts revised slightly lower for 2018 and cut by half percentage point for 2019, mainly to allow for upcoming reweighting of CPI. “The assessment of pricing pressures in the near term has not changed,” the RBA said.
  • Quarterly GDP growth to ease slightly in third quarter, then to average about 3% over next couple of years, led by resource exports and more positive business investment
  • Household consumption likely slowed in third quarter after weak retail data; weak income growth and high debt levels are constraints
  • Labor market conditions have “strengthened considerably” and forward indicators suggest “above-average employment growth” will continue.

State of Play

The Reserve Bank of Australia has set the scene for a pickup in the economy while incorporating caveats seen in developed-world counterparts -- where tight labor markets have failed to drive up wages, yet they’re nonetheless starting to remove stimulus. A key concern is how Aussie households cope with record-high debt.

Westpac Banking Corp. CEO Brian Hartzer said in an analyst call Monday: “We don’t see the cash rate moving for some time.” Traders aren’t pricing in a really strong chance of a rate increase until November 2018.

Key Quotes

  • “The experience of economies with tighter labor markets than Australia’s shows how long it can take for pricing pressures to emerge in an environment of strong local and global competition.”
  • “The outlook for business investment looks to be more positive than it has for some time” and “following recent data revisions non-mining business investment now appears to be increasing by more than previously thought.”
  • “The stimulatory setting of monetary policy in Australia has supported the economy and helped generate a decline in unemployment. Over the period ahead, further progress on reducing spare capacity in the economy is expected, which in turn would support the forecast gradual increase in inflation.”
  • Among key uncertainties, “the decision by Chinese authorities to implement substantial cuts to steel production for environmental reasons over the next few months increases the likelihood of near-term volatility in Chinese iron ore and coking coal demand.”

Economist Takeaways

  • “Taken at face value, today’s forecasts suggest scope to ease should activity, the labor market, and wages growth disappoint,” said Su-Lin Ong, head of Australian economic and fixed-income strategy at Royal Bank of Canada. “Persistently sub-target inflation would be harder to ignore in such circumstances. We are a little surprised by the muted reaction from the market.”
  • “It is our view that the decision to lower the forecasts to below the bottom of the band in 2018 and at the bottom of the band in 2019 has significant policy implications,” said Bill Evans, chief economist at Westpac in Sydney, referring to inflation. “These forecasts no longer portray a central bank that expects to raise rates.”
  • “This morning’s statement is mostly a ’steady as she goes’ document. The Bank remains constructive about the domestic economic outlook but is in no rush to change the stance of monetary policy,” said Justin Fabo at Macquarie Bank Ltd. “Australia’s economy is behind other developed economies in the cycle so the bank has ample scope to watch how inflation developments play out abroad.”

The Backdrop

The central bank is likely to keep its cash rate on hold for some time yet as it forecasts a strengthening labor market will eventually drive wage gains and faster inflation. Household spending remains a key uncertainty -- particularly after retail sales posted the weakest three-month stretch in seven years -- as policy makers fret that highly indebted households struggling with record-low wage growth will be spooked out of spending. Consumption accounts for more than half of gross domestic product.

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