RBA leaves rates on hold, but sounds a warning over pressures on households

Photo: Robert Cianflone/ Getty Images.

The Reserve Bank of Australia (RBA) left interest rates unchanged at 1.5% at the conclusion of its November monetary policy meeting, an outcome that was widely expected by financial markets.

And nor does it appear likely that rates will change anytime soon with the bank yet again delivering a neutral bias in the final paragraph of today’s 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.”

Ahead of the release of its quarterly statement on monetary policy (SoMP) on Friday, the board indicated there will be no substantive changes to its economic forecasts, noting they were “largely unchanged”.

“The central forecast is for GDP growth to pick up and to average around 3% over the next few years,” it said.

Growth of such magnitude, should it occur, would be above the 2.75% level that many regard to be Australia’s trend growth rate.

Underpinning those forecasts, the bank remains optimistic that business investment, public infrastructure projects and stronger labour market conditions will continue to bolster growth over the forecast period.

“The outlook for non-mining business investment has improved, with the forward-looking indicators being more positive than they have been for some time,” it said, adding that “increased public infrastructure investment is also supporting the economy”.

On the labour market, it said conditions continued to “strengthen” with forward-looking indicators “continuing to point to solid growth in employment over the period ahead”.

As a result, it sees unemployment gradually declining from its present level of 5.5% over its forecast period.

And with labour market conditions expected to tighten, it still expects wage pressures will slowly build in the years ahead.

“Stronger conditions in the labour market should see some lift in wage growth over time,” it said.

However, acknowledging recent weakness in Australian retail sales, the RBA delivered a major caveat to those forecasts, acknowledging that household consumption remained “one continuing source of uncertainty”.

“Household incomes are growing slowly and debt levels are high,” it said, an observation that suggests it still remains concerned about financial stability risks.

Of all the domestic considerations at present, the household sector, the largest and most important part of the economy, remains the greatest source of uncertainty.

Coupled with persistently weak inflationary pressures and a slowing housing market, that looks set to see rates remain unchanged for the foreseeable future.

Following the release of Australia’s September quarter consumer price inflation (CPI) report last month, the board noted that inflation remains “low”, thanks in part to weak price pressures in the retail sector.

“Inflation is likely to remain low for some time, reflecting the slow growth in labour costs and increased competitive pressures, especially in retailing,” it said.

However, it remains confident that inflationary pressures will build in the period ahead, acknowledging it will “pick up gradually as the economy strengthens”, repeating the line from October.

On the housing market, another key area for policy consideration, it offered a more subdued assessment, noting “prices have shown little change over recent months, although they are still increasing in Melbourne.”

Previously it said prices had been rising “briskly in some markets, while in others they had been declining”.

It also signaled out Sydney, continuing the pattern of recent months, acknowledging that “conditions have eased further”.

According to data from CoreLogic, prices in Sydney have fallen in the past two months, coinciding with clearance rates in the city falling to the lowest level since January 2016.

Despite the moderation in the housing market, it again warned that “growth in housing debt has been outpacing the slow growth in household income for some time”. Again, another sign that it remains concerned about the potential for financial instability should that trend continue.

However, hinting that it is becoming more comfortable that those risks are being contained, it said that “credit standards have been tightened in a way that has reduced the risk profile of borrowers”.

Outside of those areas, the remainder of the statement was either unchanged or largely as expected.

On the Australian dollar, it 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”, maintaining the same view offered in October.

Internationally, it said that the global economy is “continuing to improve”, a slight tweak from October when it said they had “improved”.

“Labour markets have tightened and further above-trend growth is expected in a number of advanced economies, although uncertainties remain,” it said, adding in the word “further” in today’s statement.

Elsewhere the commentary largely reflected changes in monetary policy settings seen since it last met on October 3.

“In the United States, the Federal Reserve has started the process of balance sheet normalisation and expects to increase interest rates further. In a number of other major advanced economies, monetary policy has become a bit less accommodative,” it noted.

So where does that leave the outlook for interest rates domestically?

In a nutshell, they’re going nowhere fast.

While the RBA maintains an optimistic view on the outlook for the economy, concerns about the household sector, along with weak inflationary pressures, suggests it will be some time yet before it considers lifting interest rates, particularly at a time when the housing market is slowing.

Until it gets greater clarity on those fronts, policy will almost certainly remain the same.

The full November monetary policy statement can be found here.

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