RBA keeps rates on hold again for March

The Reserve Bank has decided to keep the cash rate on hold at a record low 1.5 per cent for March, where is has stayed since August 2016.

Late last month, weak wages growth and slow progress reducing unemployment saw analysts and economists revise expectation of rate hikes this year.

Instead of two cash rate increases, experts now only expect one rates movement announcement, which will not happen until later this year.

Also read: NAB has scaled back its expectations for RBA rate hikes this year

By late 2018 growth should be near 3% and the unemployment rate approaching 5%. That, together with increasing tightness in employers’ ability to find suitable labour, may finally see private sector wages start to moderately edge up.

Inflation by that time should also be approaching the bottom of the 2-3% target range.

That said, much will still depend on the data flow – it is not impossible that the RBA stays on hold for all of 2018 and raises rates in early 2019.

According to Corelogic, the controlled slowdown in housing markets, driven by subtle falls across Sydney and Melbourne, have eased pressure on the RBA to lift rates in order to quell housing market exuberance.

Higher on the RBA Board’s agenda is likely to be inflation and employment. Year ended inflation averaged just 1.9% over 2017, and the unemployment rate was 5.5% in January, up from 5.4% in November last year. Continued low wages growth (2.1%), and the outlook for the Australian dollar and commodity prices will also be important considerations.

“A soft landing for the housing market, which appears to be underway, is likely to be a very welcome outcome from the RBA.,” Corelogic head of research Tim Lawless said.

“We have macroprudential policies to thank for softer housing market conditions; investment activity has reduced and lending policies are firmer. The bi-product has been weaker market conditions in the cities where investment activity has been concentrated: Sydney, and to a lesser extent, Melbourne. Dwelling values in Sydney have reduced by 3.7% since peaking in July last year and Melbourne vales are 0.4% lower since peaking in November.'”

“Despite the hold decision from the RBA, mortgage rates remain close to historic lows, particularly for owner occupiers who are paying down both their interest and principal,” he added.

“Investors are facing a mortgage rate premium of around 60 basis points, but relative to long term averages, their mortgage rates are low. While the RBA has flagged the next move in interest rates will be a rise, it remains likely that any hike to the cash rate is well in the future,” Lawless said.

Glenn Stevens, Governor: Monetary Policy Decision

At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.

The global economy has strengthened over the past year. A number of advanced economies are growing at an above-trend rate and unemployment rates are low. Growth picked up in the Asian economies in 2017, partly supported by increased international trade. The Chinese economy continues to grow solidly, with the authorities paying increased attention to the risks in the financial sector and the sustainability of growth.

The pick-up in the global economy has contributed to a rise in oil and other commodity prices over the past year. Even so, Australia’s terms of trade are expected to decline over the next few years, but remain at a relatively high level.

Globally, inflation remains low, although higher commodity prices and tight labour markets are likely to see inflation increase over the next couple of years. Long-term bond yields have risen but are still low. Market volatility has increased from the very low levels of last year. As conditions have improved in the global economy, a number of central banks have withdrawn some monetary stimulus. Financial conditions remain expansionary, with credit spreads narrow.

The Bank’s central forecast is for the Australian economy to grow faster in 2018 than it did in 2017. Business conditions are positive and non-mining business investment is increasing. Higher levels of public infrastructure investment are also supporting the economy. Further growth in exports is expected after temporary weakness at the end of 2017. One continuing source of uncertainty is the outlook for household consumption. Household incomes are growing slowly and debt levels are high.

Employment grew strongly over the past year and the unemployment rate declined. Employment has been rising in all states and has been accompanied by a significant rise in labour force participation. The various forward-looking indicators continue to point to solid growth in employment over the period ahead, with a further gradual reduction in the unemployment rate expected. Notwithstanding the improving labour market, wage growth remains low. This is likely to continue for a while yet, although the stronger economy should see some lift in wage growth over time. Consistent with this, the rate of wage growth appears to have troughed and there are reports that some employers are finding it more difficult to hire workers with the necessary skills.

Inflation remains low, with both CPI and underlying inflation running a little below 2 per cent. Inflation is likely to remain low for some time, reflecting low growth in labour costs and strong competition in retailing. A gradual pick-up in inflation is, however, expected as the economy strengthens. The central forecast is for CPI inflation to be a bit above 2 per cent in 2018.

On a trade-weighted basis, the Australian dollar remains within the range that it has been in over the past two years. An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.

The housing markets in Sydney and Melbourne have slowed. Nationwide measures of housing prices are little changed over the past six months, with prices having recorded falls in some areas. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. APRA’s supervisory measures and tighter credit standards have been helpful in containing the build-up of risk in household balance sheets, although the level of household debt remains high.

The low level of interest rates is continuing to support the Australian economy. Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual. Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.