RBA leaves rates on hold as expected

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The Reserve Bank of Australia (RBA) has left the official cash rate unchanged at 1.5%.

RBA Governor Philip Lowe made no notable changes to his statement accompanying the monetary policy decision.

While sticking to its 3% growth target over the next couple of years, the bank is aware of the challenges involved as the economy transitions away from the mining boom. On the subject of non-mining investment, the bank’s tone changed slightly in its latest statement.

While it said in March and April that non-mining investment had shown signs of growth over the past year, today the bank wrote that “non-mining investment remains low as a share of GDP and a stronger pick-up would be welcome”.

On the key themes of housing and the labour market, the bank repeated its assertions from the April statement that financial stability risks and slow wage growth remained central on its radar.

While highlighting the relatively high level of unemployment, the bank slightly adjusted its wording on the labour market following a strong employment report in mid-April.

“Indicators of the labour market remain mixed. The unemployment rate has moved a little higher over recent months, but employment growth has been a little stronger,” the bank said.

The bank said that it still expects the unemployment rate to steadily decrease over time. However, it changed its wording from “wage growth remains slow” to “wages growth remains slow and this is likely to remain the case for a while yet”.

According to JP Morgan analyst Sally Auld, that another key indicator that rates aren’t going anywhere.

“This is a clear indication that rate hikes are a distant prospect – the RBA will not be hiking until there is a sustained recovery in labour incomes,” Auld said.

Slow wage growth will be a factor in the RBA’s inflationary expectations, given that some measures of consumption such as retail spending fell in last week’s inflation report for the March quarter.

The bank was relatively positive today in its reference to last weeks’ CPI data, noting that headline inflation increased in line with expectations.

The result seems to have given the RBA some level of comfort that inflation has at least stabilised, and the overall tone of this month’s statement was a little more positive.

“Growth in consumption is expected to remain moderate and broadly in line with incomes,” it said. “In underlying terms, inflation is running at around 1.75%, a little higher than last year. A gradual further increase in underlying inflation is expected as the economy strengthens.”

That was somewhat more bullish in tone than the April statement, when the bank said that “the rise in underlying inflation is expected to be a bit more gradual with growth in labour costs remaining subdued”.

On the subject of housing, the bank repeated its concerns about the pace of growth in household debt. It was optimistic that the recent macro-prudential measures would help address the risk associated with high household debt.

The bank highlighted the variability in growth across different markets, and introduced a new line about supply: “In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years.”

That replaced comments in the April statement putting the onus on lenders to be responsible in determining loan serviceability requirements.

In adopting a neutral stance in today’s statement, the RBA confirmed the general market consensus that rates will stay on hold at 1.5% for the remainder of 2017.

The bank will be closely monitoring signs of any further weakness in the labour market, which would be the only driver for the RBA to cut rates further given the ongoing concerns about financial stability.

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