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RBA, Fed Take Different Rate Path

The chance of a rate rise just pushed out even further - possibly into 2020 as the AMP’s Shane Oliver has already forecast after comments yesterday from the Reserve Bank Governor, Phil Lowe and the latest economic forecast from the National Australia Bank are any guide.

While business conditions and confidence remain solid (as the NAB’s latest survey on Tuesday confirmed), consumer confidence is having the best run in four years, jobs growth is remains solid (with the May employment data out today), inflation remains low - and yet the RBA is as far away from a rate increase as it has ever been.

The RBA’s position contrasts markedly with the US Federal Reserve which remains on its monetary policy tightening track after its latest meeting ended early Thursday. US rates are now well above our cash rate of 1.50% which looks like remaining in place for another year at least and possibly as long as 18 months.

In his speech yesterday in Melbourne, Dr Lowe said “Any increase in interest rates, however, still looks to be some time away.The (RBA) Board will want to have reasonable confidence that inflation is picking up to be consistent with the medium-term target and that slack in the labour market is lessening.

“At this stage, a sustained pick-up in inflation to around the midpoint of the target range is likely to require faster wages growth than we are currently experiencing. There are reasonable grounds to expect that this increase in wages growth will occur. But for the reasons I have spoken about today, this increase is likely to be only gradual.

“Given this, there is not a strong case for a near-term adjustment in monetary policy,” Dr Lowe told a lunch of the Australian industry Group in Melbourne.

Furthermore he pointed out that the present period of weak wage growth was is “diminishing our sense of shared prosperity”, impacting the ability of people to repay large loans (for housing) taken out in expectation of future income increases.

“Whatever weight one places on these various factors constraining wages growth, it is clear that the slow growth in wages is affecting our economy," Dr Lowe said in a speech to the Australian Industry Group in Melbourne on Wednesday. “If this remains the case, it can make needed economic reforms more difficult,” he added.

And his glum outlook is shared by the NAB which updated its forecast for the Australian economy in the wake of its solid June business conditions and confidence survey.

The NAB summarised its outlook by saying that “given the absence of any recent progress on the wages/unemployment front to-date, we recently removed our call for a RBA rate hike later this year.”

"An environment of above trend growth, declining unemployment and (down the track) higher wages growth is consistent with the RBA eventually withdrawing emergency low monetary policy settings. We have pencilled in a rate hike in mid-2019, but the timing of any move by the RBA remains highly data dependent.”

That sounds very much like some recent post-meeting statements from Dr Lowe.

View More Articles By Glenn Dyer

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.



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