RBA keeps rates on hold amid global stock market turmoil

The Reserve Bank has decided to keep the cash rate on hold at a record low 1.5 per cent at its first board meeting of year, where it has stood since August 2016.

Following the RBA’s decision to sit tight on interest rates at its December board meeting, academics and economists predicted that weak wage growth would likely restrain the Reserve Bank from raising the official interest rates anytime soon, despite a wealth of upbeat economic figures in recent weeks.

Also read: Could we see a shift in the Aussie economy?

Since the board last met, unemployment has continued to soar, there has been a pick-up in retail spending, the housing market has returned to some normality that has allowed first-home buyers to return and consumer and business confidence has firmed.

“With headline inflation remaining below the RBA’s target range of 2-3%, housing markets moving through a controlled slow down, a higher than forecast Australian dollar and household debt at record highs, the hold decision from the Reserve Bank was widely expected,” Corelogic head of research Tim Lawless said.

“With national dwelling values now drifting lower, the RBA can now focus more on economic trends outside of the housing market when contemplating monetary policy settings.”

According to CoreLogic’s’ hedonic indices, the heat has come out of the Australian housing market, with national dwelling values falling by 0.7% since peaking in September last year.

Falling dwelling values are the result of tighter credit conditions rather than any changes in monetary policy settings.

Also read: US stocks plummet, should we be worried?

Despite the stable cash rate, investors have seen an average 40 basis points increase in their mortgage rates due to higher capital requirements from lenders, which has helped to slow investment demand and quell rapidly rising home values.

Interest rates won’t stay at their record lows forever. Financial markets have fully priced a 25 basis point rise by February next year.

In the meantime, Corelogic expect housing market demand to be supported by low mortgage rates and high rates of population growth, despite the easing in capital growth rates that have been most evident in Sydney and, to a lesser extent, Melbourne dwellings.

Glenn Stevens, Governor: Monetary Policy Decision

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

There was a broad-based pick-up in the global economy in 2017. A number of advanced economies are growing at an above-trend rate and unemployment rates are low. Growth has also picked up in the Asian economies, 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 recent months. Even so, Australia’s terms of trade are expected to decline over the next couple of 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. 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 for the Australian economy is for GDP growth to pick up, to average a bit above 3 per cent over the next couple of years. The data over the summer have been consistent with this outlook. Business conditions are positive and the outlook for non-mining business investment has improved. Increased public infrastructure investment is also supporting the economy. 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 2017 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. There are reports that some employers are finding it more difficult to hire workers with the necessary skills.

Inflation is 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.

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. To address the medium-term risks associated with high and rising household indebtedness, APRA introduced a number of supervisory measures. Tighter credit standards have also been helpful in containing the build-up of risk in household balance sheets.

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.