RBA keeps rates unchanged, remains optimistic on wage growth

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The Reserve Bank of Australia (RBA) left interest rates unchanged at 1.5% at the conclusion of its December policy meeting, an outcome widely expected by economists and markets.

And going off the accompanying monetary policy statement, it looks like the bank’s eleventh and final meeting of the year was a quick one.

It retained a neutral policy bias and made no substantial tweaks elsewhere in the accompanying monetary policy statement.

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

That was exactly the same as what the bank communicated in its November policy statement, and is a clear indication that rates are unlikely to move in either direction for the foreseeable future.

Outside of those outcomes that were entirely expected by the markets, the rest of the statement was largely unchanged from November.

The bank remains optimistic on the outlook for business and public investment, along with the outlook for the labour market, but remains uncertain as to whether that will translate to an improvement in household spending, the largest and therefore most important part of the Australian economy.

Of all the changes in the statement, probably the most substantive came from its view on labour market conditions with the bank noting that there are signs emerging that tighter labour market conditions are leading to some skill shortages for some employers.

“There are reports that some employers are finding it more difficult to hire workers with the necessary skills,” the bank said, adding an additional line to that communicated in November.

Despite those encouraging sign for wage pressures, it acknowledged that wage growth remains “low”.

“This is likely to continue for a while yet, although the stronger conditions in the labour market should see some lift in wage growth over time,” the statement read, adding that employment growth “has been strong over 2017”, a small tweak from the view communicated in November that labour market conditions had “continued to strengthen”.

It again repeated that “various forward-looking indicators continue to point to solid growth in employment over the period ahead.”

On the outlook for the broader Australian economy, its assessment was largely a carbon copy from four weeks ago.

“Recent data suggest that the Australian economy grew at around its trend rate over the year to the September quarter,” it said, referring to the release of Australia’s GDP report tomorrow. “The central forecast is for GDP growth to average around 3% over the next few years.”

Helping to underpin that view, it continued to talk up the outlook for business and government investment.

“The outlook for non-mining business investment has improved further, with the forward-looking indicators being more positive than they have been for some time,” the statement said, adding the word “further” following the release of Australia’s Q3 private capital expenditure report last week.

It again repeated that “increased public infrastructure investment is also supporting the economy”.

Despite the release of a reasonable Australian retail sales report for October during its meeting, it again warned that “one continuing source of uncertainty is the outlook for household consumption”.

“Household incomes are growing slowly and debt levels are high,” the RBA said, repeating the line it used in November.

Perhaps adding to uncertainty over the household sector despite strengthening labour market conditions, it tweaked its language towards housing market conditions, noting that “nationwide measures of housing prices are little changed over the past six months, with conditions having eased in Sydney”.

In November, it said that in most cities “housing prices have shown little change over recent months, although they are still increasing in Melbourne”.

The small change largely reflects recent data on house prices, auction clearance rates and housing credit growth seen in recent months.

The housing market is cooling, and the RBA’s view merely reflects that.

Outside of those areas, the RBA also made few substantive changes to its view on the inflation outlook and the Australian dollar.

“Inflation remains low, with both CPI and underlying inflation running a little below 2%. The Bank’s central forecast remains for inflation to pick up gradually as the economy strengthens,” it said in relation to price pressures.

There has been little new information on that front since November 7, when the RBA board last met, to warrant a change in view.

On the Australian dollar, the bank again warned that “an appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast”.

It added the line that the dollar “remains within the range that it has been in over the past two years”, a statement that merely reflects movements over this period rather than a tweak in policy stance.

Outside of Australia, the RBA retained an optimistic view on global economic conditions.

“Conditions in the global economy have improved over 2017,” a small tweak from November when it said that they are “continuing to improve”.

“Labour markets have tightened and further above-trend growth is expected in a number of advanced economies, although uncertainties remain.”

Of note, it pointed out recent developments in financial market conditions in China — Australia’s largest trading partner — “have tightened somewhat as the authorities address the medium-term risks from high debt levels”.

This reflects recent increases in Chinese interest rates, something that has resulted in some financial volatility in Chinese bonds and stocks.

Nevertheless, it noted that China’s economy “continues to be supported by increased spending on infrastructure and property construction”.

The bank’s views outside of China were largely the same with the only changes reflecting recent movements in monetary policy settings and financial markets.

“Wage growth remains low in most countries, as does core inflation,” it said.

“In a number of economies there has been some withdrawal of monetary stimulus, although financial conditions remain quite expansionary.

“Equity markets have been strong, credit spreads have narrowed over the course of the year and volatility in financial markets is low,” it remarked, adding the line that “long-term bond yields remain low, notwithstanding the improvement in the global economy”.

With few major changes and the bank retaining a neutral policy outlook, there is few implications from today’s statement. The RBA is unlikely to change rates any time soon given the current set of circumstances.

In the absence of an unscheduled interest rate meeting in January, the board will not meet again until February 6 next year. This will provide ample time to monitor incoming economic data to see whether a change in policy is warranted.

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