RBA Sees Inflation Rising Only Gradually as Economy Strengthens

Updated on
  • Household balance sheets ‘still warranted careful monitoring’
  • Central bank releases minutes of February rate meeting
Photographer: Brendon Thorne/Bloomberg

Australia’s central bank reiterated that inflation is expected to “only gradually” accelerate as the economy strengthens and wage pressures increase, in minutes of this month’s policy meeting.

Main Takeaways

  • Synchronized nature of global growth upswing, to above- trend rates in many cases, has increased confidence that inflationary pressures would start to build
  • Private debt levels remain elevated and household balance sheets still warrant careful monitoring
  • Strong retail competition has exerted downward pressure on consumer goods and food for some time and was expected to persist “in the next few years”
  • Business conditions remained at a relatively high level and prospects for non-mining investment “were more positive than they had been for some time”
  • Low level of interest rates had aided progress in reducing unemployment and bringing inflation closer to target
  • Australian dollar little changed immediately after report

State of Play

More of the same from the Reserve Bank of Australia: the economy is moving in the right direction with unemployment at 5.5 percent after a jobs bonanza in 2017; but few signals of that strength translating into higher wage growth. Policy makers are watching and waiting with little sign they will pull the trigger on higher rates until the jobless rate falls further and inflation is nearer the middle of their 2 percent to 3 percent target.

Key Quotes

  • “The pipeline of public infrastructure work was around its highest level as a share of GDP in several decades”
  • “Members noted that food prices, excluding fruit and vegetables, had been little changed for nearly a decade”
  • “There was still a risk that growth in consumption might turn out to be weaker than forecast if household income growth were to increase by less than expected. In an environment of high household indebtedness, consumption might be particularly sensitive to adverse developments in household income or wealth”
  • “Coal exports were expected to have recovered in early 2018” after declining in the December quarter

The Background

The central bank has held interest rates for 16 meetings and achieved some success in boosting business investment and hiring -- yet this has so far failed to translate into higher wages and faster inflation. It expects to see gradual improvement on those fronts as unemployment falls toward 5 percent; meanwhile, with record-high household debt following an east coast property boom, policy makers are likely to remain cautious and traders see little chance of a tightening before December.

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