- The RBA kept interest rates unchanged for a 17th consecutive meeting in March.
- Despite another weak increase last quarter, the bank appears confident that Australian wage growth has turned the corner.
- The bank again signaled out household spending as “one continuing source of uncertainty”.
The Reserve Bank of Australia (RBA) pulled few surprises in March, keeping interest rates unchanged at 1.5% for a 17th consecutive meeting.
And based on its guidance in the final paragraph of the March statement, it appears Australia’s record-breaking run of interest rate inertia will continue for some time yet.
“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 board said, repeating the line used in February.
“Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual.”
In a nod to the impact of current monetary policy settings, it again acknowledged that “the low level of interest rates is continuing to support the Australian economy”.
In the wake of Australia’s soft December quarter wage price index released late last month — a report that revealed very little sign of wage pressures for private sector workers — the RBA expressed few concerns, suggesting that the worst of Australia’s wage growth deceleration is now over.
“The rate of wage growth appears to have troughed and there are reports that some employers are finding it more difficult to hire workers with the necessary skills,” it said.
Despite that half-glass-full assessment, it noted that it will likely take some time for workers to experience any meaningful increase in wages despite stronger labour market conditions.
“Notwithstanding the improving labour market, wage growth remains low,” it said. “This is likely to continue for a while yet, although the stronger economy should see some lift in wage growth over time.”
Helping to explain the bank’s cautious optimism over the outlook for wages, it said that “various forward-looking indicators continue to point to solid growth in employment over the period ahead, with a further gradual reduction in the unemployment rate expected”.
As the labour market tightens, with fewer workers available to firms, wage growth should follow suit, in a nutshell.
However, with Australia’s unemployment rate currently sitting in the mid-5% region — well above the 5% level many think unemployment will need to fall below before wage pressures start to build — that point still appears a long way off, likely ensuring interest rates will remain at record-low levels for some time yet.
Fitting with the RBA’s message on outlook for wage growth, it remains confident that inflationary pressures will slowly build over the coming quarters.
“A gradual pick-up in inflation is… expected as the economy strengthens,” it said, repeating the line that its “central forecast is for CPI inflation to be a bit above 2% in 2018”.
Speaking in February, RBA Governor Philip Lowe suggested that annual wage growth in the vicinity of 3.5% would likely be required to keep inflation steady at the mid-point of the bank’s 2-3% target.
Annual wage growth currently sits at just 2.08%, underlining why it will likely be some time yet before the RBA considers the need for higher interest rates.
Outside of the bank’s assessment on the outlook for wage and inflationary pressures, the rest of the March statement offered few, if any, real surprises.
It’s language on the Australian dollar was unchanged, as was the warning that “an appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast”.
Ahead of the release of Australia’s Q4 GDP report tomorrow, it said that it expects “the Australian economy to grow faster in 2018 than it did in 2017”.
When it met one month ago, it said that GDP growth was expected to “average a bit above 3% over the next couple of years”.
The change in commentary could reflect that it has already released its updated forecasts. It also raises the possibility that it’s less confident that will occur.
Time will tell.
Helping to fuel that expected pickup in growth, it said that business conditions were “positive” with non-mining business investment “increasing”. It added that after a stumble in the December quarter of last year, further growth in exports was “expected”.
Ensuring optimism over the outlook for economic growth is kept in check, it again signaled out household consumption as “one continuing source of uncertainty”.
“Household incomes are growing slowly and debt levels are high,” it repeated.
Underlining that uncertainty, Australian retail sales grew by a paltry 0.1% in January following a 0.5% decline in December.
On the Australian housing market, another key area for policy consideration, it tweaked its language compared to February, adding the line that Sydney and Melbourne’s housing markets have “slowed”.
On the progress in addressing financial stability risks, it noted that “APRA’s supervisory measures and tighter credit standards have been helpful in containing the build-up of risk in household balance sheets”, adding that “the level of household debt remains high”.
Previously, it described household debts as both “high” and “rising”.
The small change indicates that the RBA is becoming more comfortable that APRA attempts to address financial stability risks are working.
Outside of Australia, the bank commentary on the global economy was also much the same, acknowledging that growth had “strengthened over the past year”.
It did touch upon the recent lift in financial market volatility, suggesting that it had “increased from the very low levels of last year”.
However, for the real economy, it appeared relaxed about recent developments.
“Financial conditions remain expansionary, with credit spreads narrow,” it said. “Long-term bond yields have risen but are still low.”
There has been very little reaction in financial markets to the March policy decision, reflecting that much of it was largely identical to that seen over the past month.
Like the RBA, markets are waiting for confirmation that stronger labour market conditions and stronger economic growth will eventually feed through to wage and inflationary pressures before getting too excited about the prospect for the first rate rise since late 2010.
Given current circumstances, we’re nowhere near that point as yet.
The full monetary policy statement can be accessed here.
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