No movement on interest rates for some time was the message from yesterday’s Reserve Bank board meeting and a speech made in Brisbane after the meeting by Governor Phil Lowe.
In fact his comments last night at a post-meeting dinner were more emphatic than in his statement earlier in the day – as were his comments on the current low wage wage regime.
Dr Lowe said the central bank was aiming to stimulate the economy without adding to already high levels of household debt.
Low interest rates are supporting jobs growth and helping inflation return to average levels, and the outlook for investment is looking brighter…These are positive developments," Dr Lowe said.
“Even so, it will be some time before we are at what could be considered full employment in Australia and before underlying inflation is at the mid-point of the medium term target range. This means that stimulatory monetary policy continues to be appropriate."
The cash rate has been steady since August 2016, and Dr Lowe said any cuts since then to speed up jobs growth would have encouraged highly indebted households to borrow even more.
“More borrowing might have helped today, but it could come at a future cost," he said. "So the board has been prepared to be patient and has not sought to overly engineer or fine-tune things."
Dr Lowe also addressed recent speculation of impending rate hikes, which was triggered by discussion at the RBA board’s July meeting of the neutral cash rate – an estimate of the level at which the cash rate neither expands or contracts the economy.
The RBA governor said the board’s discussion of a neutral cash rate of 3.5% should carry no particular message about where the cash rate is headed in the short term, but said it would likely head in that direction in coming years.
“As we make further progress on both unemployment and inflation, we could expect the cash rate to move towards this neutral rate over time,” he said.
That would imply a cash rate of 3.5%, but the question for all of us is how long is ‘over time’? At the moment it looks like being 2020 or later.
On wages, he said "Over the past four years, nominal average hourly earnings have grown at the slowest rate in many decades. This means that borrowers haven’t been able to rely on rising incomes to reduce the real value of the debt repayments in the way they used to; debt-service ratios will stay higher for longer. This is something that both lenders and borrowers need to take into account.”
"The slow growth in wages is contributing to low inflation outcomes globally. My expectation is that this is going to continue for a while yet, given that the structural factors at work are likely to persist. But I am optimistic enough that I don’t see it as a permanent state of affairs. It is likely that, as our economy strengthens and the demand for labour picks up, growth in wages will pick up too.
"The laws of supply and demand still work. Even at the moment, we see some evidence through our liaison program that in those pockets where the demand for labour is strong, wages are increasing a bit more quickly than they have for some time. The Reserve Bank’s central scenario is that, over time, this will become a more general story,“ Dr Phillips said.
