The RBA is more confident about growth and lower unemployment

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  • The Reserve Bank of Australia (RBA) kept its cash rate unchanged at 1.5% in November, maintaining the status quo that’s been in place since August 2016.
  • It flagged upgrades to its new GDP growth and unemployment forecasts that will be released on Friday. It also sees inflation eventually returning to the midpoint of its 2-3% inflation target.
  • It still regards the outlook for household consumption — the largest part of the economy — as being “one continuing source of uncertainty”. It also acknowledged that some asset prices had declined, hinting its evaluating the impact of weaker house and stock prices on household spending.
  • Despite greater optimism towards GDP growth and unemployment, it says progress in returning inflation to its target is “likely to be gradual”.

The Reserve Bank of Australia (RBA) kept its cash rate unchanged at 1.5% at the conclusion of its November monetary policy meeting, maintaining the status quo that’s been in place since August 2016.

The decision was widely expected by both economists and financial markets.

Ahead of updated forecasts from the RBA on GDP growth, inflation and unemployment that will be released on Friday, all of the interest today was on whether or not the bank would flag any potential changes in its November Statement on Monetary Policy (SoMP).

In short, it did, suggesting economic growth is now likely to be faster than it thought just three months ago.

“The Australian economy is performing well,” RBA Governor Philip Lowe said.

“The forecasts for economic growth in 2018 and 2019 have been revised up a little.

“The central scenario is for GDP growth to average around 3.5% over these two years, before slowing in 2020 due to slower growth in exports of resources.”

Previously, the RBA saw GDP growth averaging 3.25% both this year and next.

Australia’s trend GDP growth is widely regarded as being around 2.75% per annum. This is the level of growth where unemployment and inflationary pressures are stable. By forecasting GDP growth 75 basis points above trend both this year and next, it suggests the RBA anticipates lower unemployment and stronger inflation into 2020.

Its commentary on the broader Australian economy was much the same as that offered in October.

“Business conditions are positive and non-mining business investment is expected to increase,” Lowe said. “Higher levels of public infrastructure investment are also supporting the economy, as is growth in resource exports.”

Following weak retail sales and new car sales in the September quarter, the bank retained the view that “one continuing source of uncertainty is the outlook for household consumption”.

“Growth in household income remains low, debt levels are high and some asset prices have declined.”

The acknowledgement that asset prices — namely home prices and stocks — had fallen was added to the November statement.

Clearly, the bank is monitoring the impact of falling asset values on broader household spending.

It also sounded more optimistic about commodity prices, noting the increase in Australia’s terms of trade was “stronger than earlier expected”, a factor it said “helped boost national income”.

In regard to the housing market, the bank maintained a similar tone to a month earlier.

“Conditions in the Sydney and Melbourne housing markets have continued to ease and nationwide measures of rent inflation remain low,” Lowe said.

He acknowledged a recent moderation in housing credit growth to owner-occupiers, noting that it had “eased” but still remained “robust”.

The statement repeated that credit demand from investors had “slowed noticeably” with credit conditions “tighter than they have been for some time”.

Lowe also acknowledged that mortgage rates remain “low” with “strong competition for borrowers of high credit quality”, repeating the view from October.

However, while the bank is monitoring incoming data for clues as to whether a declining wealth effect is crimping household spending, it sounded increasingly optimistic on the outlook for unemployment.

It now thinks it will fall further in the years ahead, continuing the downtrend of recent years.

“The outlook for the labour market remains positive,” Lowe said.

“With the economy growing above trend, a further reduction in the unemployment rate is expected to around 4.75% in 2020.”

Previously, the bank saw unemployment falling to 5% by the end of 2020, the level it sits at today.

Despite the prospect of faster economic growth and lower unemployment, the RBA maintained a cautious outlook on the outlook for wage growth, suggesting the expected increase in the years ahead was likely to be gradual.

“Wages growth remains low, although it has picked up a little,” Lowe said.

“The improvement in the economy should see some further lift in wages growth over time, although this is still expected to be a gradual process.”

The RBA also flagged an upgrade to its inflation forecasts in the coming years, suggesting “the central scenario is for inflation to be 2.25% in 2019 and a bit higher in the following year”.

By being a “bit higher than 2.25%”, that suggests it sees inflation reaching the midpoint of its 2-3% inflation target. The only question is whether it’s for headline or underlying inflation, or both.

More broadly, Lowe described inflation as “low and stable”. Nor did he express any concern about weakness in Australia’s September inflation report released last week.

“These outcomes were in line with the Bank’s expectations and were influenced by declines in some administered prices due to changes in government policies,” Lowe said.

“Inflation is expected to pick up over the next couple of years, with the pick-up likely to be gradual.”

Potentially helping to fuel imported inflation, the bank said the Australian dollar is “currently in the lower part” of the range it’s been stuck in over the past two years.

Internationally, the bank made few changes to its assessment on the global economy, although it did not recent volatility in stocks and higher sovereign bond yields.

It maintained the view that the global economic expansion is “continuing”, along with its assessment that “one ongoing uncertainty regarding the global outlook stems from the direction of international trade policy in the United States”.

Despite flagging upgrades to its GDP growth, inflation and unemployment forecasts, Lowe made it clear that official interest rates will not change until its more confident this will be replicated in reality, keeping the wording of the final paragraph identical to that offered in October.

“The low level of interest rates is continuing to support the Australian economy,” Lowe said.

“Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual.”

Given many of the bank’s forecasts are premised on continued strength in labour market conditions, it’s this area of the economy that will determine what will happen next.

That ongoing process will continue later this month with the release of Australia’s Wage Price Index for the September quarter. Previously, Lowe suggested that annual growth in wages of around 3.5%, along with a modest improvement in productivity, would be required to keep inflation steady at the midpoint of its inflation target.

In the year to June, annual wage growth was just 2.1%, holding near the lowest levels on record.

The full November policy statement is available here.