- The RBA kept official interest rates unchanged for a record 25th consecutive month in September.
- It made no changes to the key final paragraph of the statement, noting “further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual”.
- It sounded more optimistic on wage growth but less confident about business investment. Its commentary on housing and wholesale funding costs was identical to August. It sounded less stressed about the level of the Australian dollar.
The Reserve Bank of Australia (RBA) kept official interest rates unchanged for a record 25th consecutive month in September, a decision that was widely expected by financial markets.
That trend looks set to remain in place for some time yet with the bank making no changes to the key final paragraph of the September statement.
“The low level of interest rates is continuing to support the Australian economy,” it said.
“Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual.
“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.”
Like the actual rate decision, that too was entirely expected by markets who currently put the odds of a 25 basis point increase in the cash rate by the end of next year at just 30%.
Throughout the remainder of the statement, the main surprise was that there were few changes. And of those that were, most echoed the glass-half-full approach that’s become a feature of recent RBA commentary.
That included the bank’s assessment on current labour market conditions, a key area the RBA is relying upon to achieve its policy objectives.
“The unemployment rate has fallen to 5.3%, the lowest level in almost six years,” the bank said, adding the “vacancy rate is high and there are reports of skills shortages in some areas”.
It also sounded more optimistic on the outlook for wages, noting that while it remains low, “it has picked up a little recently”.
“The improvement in the economy should see some further lift in wages growth over time, although this is likely to be a gradual process,” it said.
Previously it said that low wage growth was likely to “continue for a while yet”.
It dropped the reference to other forward-looking labour market indicators continuing to “point to solid growth in employment”, in line with recent data on job ads and skilled job vacancies, although it still forecasts that unemployment will fall “over the next couple of years to around 5%.
Along with a lower unemployment rate helping to boost wage pressures, it also struck an optimistic chord on economic growth, repeating that its central forecast is for “growth of the Australian economy to average a bit above 3% in 2018 and 2019”.
“In the first half of 2018, the economy is estimated to have grown at an above-trend rate,” it said.
It did tweak its language on the outlook for non-mining business investment, noting that it is “expected” to increase. It previously stated that it was “continuing” to increase.
The more cautious view follows the release of Australia’s Q2 private sector CAPEX report in late August that hinted non-mining investment may be nearing its cyclical peak.
The bank retained the view that “one continuing source of uncertainty is the outlook for household consumption”, a view cemented by flat retail spending in July.
There were few other changes in the remainder of the statement, including when it came to the housing market and higher wholesale funding costs, a factor that contributed to Westpac announcing an increase in variable mortgage rates last week.
The commentary was identical.
“Conditions in the Sydney and Melbourne housing markets have continued to ease and nationwide measures of rent inflation remain low,” it said.
It continued to suggest that the recent slowdown in housing credit growth was “largely due to reduced demand by investors”, rather than the impact of tighter lending standards limiting credit supply.
On wholesale funding costs, it repeated that they are “higher than they were at the start of the year, although they have declined somewhat since the end of June”.
Despite Westpac’s decision last week, it retained the view that while “some lenders have increased mortgage rates by small amounts… the average mortgage rate paid is lower than a year ago”.
The bank’s view on the global economy and financial conditions was left unchanged.
The only other change of note came from its commentary on the Australian dollar, stating that while it remained “within the range that it has been in over the past two years on a trade-weighted basis… it has depreciated against the US dollar along with most other currencies”.
The second part of that statement was new, and largely reflects recent broad-based weakness in the Aussie.
The acknowledgment that the Aussie dollar has fallen, along with largely positive tweaks to the remainder of the statement, has not gone unnoticed by financial markets who have bought the Aussie and sold down Australian government bond futures following its release.
This could reflect a partial unwind of market positioning which had began to price in a small chance of a rate cut, rather than a hike, in response to recent news and data flow.
Clearly, based on the RBA’s tone, it still believes the next move in official interest rates is likely to be higher. Markets, despite the modest reaction to the September statement, are yet to be convinced.
Now that the September Board meeting has concluded, attention will now turn to a speech from RBA Governor Philip Lowe at the bank’s Board Dinner in Perth.
It’s expected to begin at 7.30pm AEST.
The full September monetary policy statement can be accessed here.