RBA Chalks Up Two Years On Hold
The Reserve Bank has kept the official interest rate on hold at a record low of 1.50% for a 24th month - two years exactly since it cut the cash rate to its present level.
The decision came with a heads up from RBA Governor, Phillip Lowe that there was likely to see a drop in the inflation rate this quarter to lower 2018 CPI inflation to 1.75% from 2.1% in the June quarter (on a headline CPI basis) and nearly 2% on an underlying basis.
That compares to the May forecast of 2.25% (to be revised down in the next Statement of Monetary Policy out on Friday)
“In the interim, once-off declines in some administered prices in the September quarter are expected to result in headline inflation in 2018 being a little lower than earlier expected, at 1¾ per cent,” the statement from Governor Phil Lowe cautioned. Dr Lowe is due to speak on Demographic Change and Recent Monetary Policy at a lunch in Sydney later today.
The heads up is aimed at making sure the lower than expected CPI reading doesn’t see an outbreak of speculation about a slowing economy and increase the small but growing belief that an interest rate cut might be needed rather than an increase.
The bank will have more on its forecasts in Friday's third Statement of Monetary policy for 2018 but the statement yesterday indicates that apart from inflation there won’t be too much of a change.
The Governor said in his statement that the bank’s central forecast for the Australian economy remained unchanged with GDP growth is expected to average a bit above 3% in 2018 and 2019.
"Business conditions are positive and non-mining business investment is continuing to increase. Higher levels of public infrastructure investment are also supporting the economy, as is growth in resource exports," Reserve Bank Governor Philip Lowe said in his statement.
"One continuing source of uncertainty is the outlook for household consumption. Household income has been growing slowly and debt levels are high."
A further gradual decline in the unemployment rate is expected over the next couple of years to around 5 per cent. Wages growth remains low. This is likely to continue for a while yet, although the improvement in the economy should see some lift in wages growth over time.
“The low level of interest rates is continuing to support the Australian economy,” Dr Lowe said in the final paragraph of the statement. “ urther 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,” the statement ended.
The AMP’s Chief Economist, Dr Shane Oliver reckons the rBA could be on hold for much longer than expected. In a comment on the central bank’s decision yesterday he reckons the bank could be on hold for up to two more years.
The RBA’s own forecasts for decent growth and a gradual rise in inflation along with strong infrastructure investment, rising business investment and strong export volumes argue against a rate cut but the peak in the housing construction cycle, uncertainty about the outlook for consumer spending, the weakening Sydney and Melbourne property markets, the worsening drought, low inflation and wages growth and tight bank lending standards all argue against a rate hike.
"So the stand-off continues and the RBA will remain on hold for a while to come. The next move is probably still up but not until second half 2020 at the earliest and there is a rising risk that the next move will actually be down,” Dr Oliver wrote yesterday.
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.