RBA Pours Cold Water Over Rate Moves
As expected the Reserve Bank yesterday kept its key cash rate steady at the historical low of 1.5% for the 14th month in a row.
The widely anticipated decision saw the already jittery Aussie dollar tumble under 78 US cents in afternoon trading yesterday.
It bounced back over 78 US cents in offshore trading overnight.
Governor Phil Lowe made it clear in his post meeting statement that there will be no further moves in rates for quite a while.
"The low level of interest rates is continuing to support the Australian economy. 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,” Dr Lowe said.
The statement was substantially unchanged from a month ago, especially the comments on household debt, wage growth and the value of the Aussie dollar.
For whatever reason many in the markets reckon the RBA could see rates rise by early next year - the ANZ and other big banks are in that boat, without much evidence. Some even believe there could be two rate rises in 2018.
Dr Lowe noted that there are now "more consistent signs that non-mining business investment is picking up. A consolidation of this trend would be a welcome development. Business conditions as reported in surveys are at a high level and capacity utilisation has risen. A large pipeline of infrastructure investment is also supporting the outlook. Against this, slow growth in real wages and high levels of household debt are likely to constrain growth in household spending.
"Employment has continued to grow strongly over recent months. Employment has increased in all states and has been accompanied by a rise in labour force participation. The various forward-looking indicators point to solid growth in employment over the period ahead, although the unemployment rate is expected to decline only gradually over the next couple of years.
"Wage growth remains low. This is likely to continue for a while yet, although the stronger conditions in the labour market should see some lift in wage growth over time. Inflation also remains low and is expected to pick up gradually as the economy strengthens.
"The Australian dollar has appreciated since mid year, partly reflecting a lower US dollar. The higher exchange rate is expected to contribute to continued subdued price pressures in the economy. It is also weighing on the outlook for output and employment. An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.
"Growth in housing debt has been outpacing the slow growth in household incomes for some time. To address the medium-term risks associated with high and rising household indebtedness, APRA has introduced a number of supervisory measures. Following some tightening in credit conditions, growth in borrowing by investors has slowed a little recently. In the housing market, conditions continue to vary considerably around the country. Housing prices have been rising briskly in some markets, while in others they have been declining.
"In Sydney, where prices have increased significantly, there have been further signs that conditions are easing. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. Rent increases remain low in most cities.” Dr Lowe said.
In a note yesterday afternoon, the AMP’s Chief Economist, Dr Shane Oliver said “The RBA’s bias on interest rates for now remains neutral. Reflecting this, the $A is down but only marginally from where it was before today’s RBA announcement.
"Basically the RBA and official interest rates remain stuck between a rock and a hard place. Improving global growth, strong business confidence and jobs growth, the RBA’s own expectations for a growth pick up and already high levels of household debt argue against a rate cut.
“But record low wages growth, low underlying inflation, the impending slowdown in housing construction, risks around the consumer and the strong $A argue against a rate hike.
”The next move in rates is likely to be up, but for now the downside risks are still significant and as such we remain of the view that it’s way too early to start raising rates just yet,” Dr Oliver wrote.
Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.
At the AFR he was a finance writer, Finance Editor, News Editor and Chief of Staff. At the Nine Network he was supervising producer of Business Sunday for more than 16 years. He has also written for other online and analogue print publications here and overseas.