The Reserve Bank of Australia has left official interest rates on hold at 1.5% for a record 27th meeting in a row with low inflation, wages growth and a slowing level of activity in household consumption starting to make themselves visible – as we saw with weak December’s retail sales and a fall in January car sales to their lowest level in seven years.
Rates have now been on hold at the record low for 30 months straight, but financial markets are starting predicting the next rate move is more likely to be a cut than a hike as declining house prices impact on household spending.
The key final paragraph from yesterday’s post-meeting statement from Governor Phil Lowe was unchanged from a year ago.
“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,“ Dr. Lowe said.
But activity has slowed in that time, house prices have fallen – only the jobs market and the trade account – a near-record surplus in December of more than $3.6 billion and an all-time record calendar year surplus of more than $22 billion – are performing strongly.
The central bank will reveal lower forecasts for growth and inflation in this Friday’s first Statement On Monetary Policy for 2019 – GDP has been wound back to around 3% for this year from 3.5% and inflation is now 2% for this year (that was the forecast for 2018 which was above the 1.8% outcome), down from the 2.25% forecast in December’s statement from Dr. Lowe.
AMP Chief Economist, Dr. Shane Oliver believes the central bank is “underestimating the impact of the housing downturn on the economy – both directly via reduced housing construction and also indirectly via reduced consumer spending – and as a consequence, we see weaker growth and lower inflation than the RBA is forecasting.”
“Consistent with this we have seen a string of soft economic data releases this year including for business conditions, business conditions PMIs, consumer confidence, retail sales, housing approvals and housing starts, house prices, and job ads. As a result, our view remains that the RBA will cut the cash rate to 1% by year-end,” Dr. Oliver wrote in a note yesterday afternoon.
Dr. Lowe makes his first major speech in Sydney today at lunchtime. He is speaking about the year ahead and will speak to yesterday’s statement and Friday’s monetary policy release.
