While Reserve Bank governor, Phil Lowe says the next movement in interest rates “will be up rather than down”, don’t go running for the cliff quite yet because he reckons there won’t be any need for any movement for quite a while – possibly two years.
In fact it is quite possible rates could be on hold for another year or more. They were last cut in August 2016.
In a speech to business economists in Sydney last night, he said:
"We still, though, remain short of full employment, and inflation is expected to pick up only gradually and remain below average for some time yet. This means that a continuation of accommodative monetary policy is appropriate.
“If the economy continues to improve as expected, it is more likely that the next move in interest rates will be up, rather than down.
“But the continuing spare capacity in the economy and the subdued outlook for inflation mean that there is not a strong case for a near-term adjustment in monetary policy. We will, of course, continue to keep that judgement under review” he said.
There were quite a few business economists at the dinner last night who have forecasts of rate rises in 2018 – Goldman Sachs, the NAB, ANZ and AMP for example.
His comments saw the value of the Aussie dollar spike half a cent to around 75.80 US in offshore trading after Dr Lowe started speaking around 8pm.
Some commentators had said his ruling out of any rate rise in the near term would pressure the dollar’s value lower, but that seems not to have been the case.
Mr Lowe said wages growth was still low, rising competition in the labour market was helping keep a lid on wage growth, as was the movement of workers to lower paying jobs in the service sector (such as healthcare).
In fact his comments last night and the RBA board meeting minutes for November released earlier in the day yesterday show the central bank doesn’t have much of a clue when it comes to why wages growth remains weak. Perhaps the most accurate comment came in the minutes:
“There was considerable uncertainty around when and how quickly wage pressures might emerge and about how much these would add to inflationary pressure,” the board minutes read.
Dr Lowe told the dinner than retail competition was intensifying, the price of many food items, especially fruit and vegetables had fallen and there seems to be no easing in the price deflation and intensive competitiveness any time soon.
Inflation remains lower than expected, even on an underlying basis and even though there has been a modest rise in the past year, much of that has been driven by the indexed rise in tobacco costs and higher energy costs.
“(W)e expect inflation to pick up, but to do so only gradually. By the end of our two-year forecast period, inflation is expected to reach about 2 per cent in underlying terms, and a little higher in headline terms because of planned increases in tobacco excise. Underpinning this expected lift in inflation is a gradual increase in wage growth in response to the tighter labour market,” Dr Lowe said,
In fact a graph in the speech shows headline inflation and the RBA’s referred underlying measures not hitting the 2% bottom of the target range (of 2% to 3% over time) until well into 2019. That’s also partly due to the redrawing of the weightings in the CPI by the Australian Bureau of Statistics.
