- The RBA kept interest rates unchanged at 1.5% for a 18th consecutive meeting in April.
- The bank appears more confident on the outlook for household spending but not that Australian unemployment will continue to fall.
- Trade tensions and higher short-term funding costs for lenders also featured heavily in the bank’s deliberations in April.
The Reserve Bank of Australia’s (RBA) kept interest rates unchanged at 1.5% at its April monetary policy meeting, an outcome that was widely expected by economists and financial markets alike.
It has now been 18 consecutive meetings since the RBA last adjusted rates, the longest run stability in official rates ever seen.
That trend looks set to continue for some time yet, with the bank providing little indication that it intends to move rates — either up or down — for the foreseeable future.
“The low level of interest rates is continuing to support the Australian economy,” the bank said in the key final paragraph of the statement.
“Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual.”
Given that view, it repeated 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”.
Financial markets and the trade war risk
While its view on the Australian economy provided few major surprises, the bank made several changes to its assessment on current financial market conditions, along with the risks posed by a potential trade war erupting between the United States and China.
“Equity market volatility has increased from the very low levels of last year, partly because of concerns about the direction of international trade policy in the United States,” it said.
The bank also noted that short-term US dollar borrowing costs have also increased, adding that this was spilling over to funding in other markets, including Australia.
“There has been some tightening of conditions in US dollar short-term money markets, with US dollar short-term interest rates increasing for reasons other than the increase in the federal funds rate,” it said.
“This has flowed through to higher short-term interest rates in a few other countries, including Australia.”
Should funding pressures persist beyond the short-term, this will further reduce the odds of a rate increase from the bank in the year ahead, especially if higher borrowing costs are passed on to Australian households and businesses.
Along with the outlook for Australian wage growth and inflationary pressures, short-term funding costs, along with potential geopolitical risks surrounding global trade, have emerged as key factors that will determine when and what direction official interest rates will move next.
The picture in Australia
As was widely expected, the bank’s assessment on the Australian economy largely repeated what was communicated one month ago.
“The Bank’s central forecast remains for faster growth in 2018,” the bank said, maintaining the same view expressed in March.
Helping to power that expected acceleration in growth, it noted that “business conditions are positive and non-mining business investment is increasing”.
It also pointed to “higher levels of public infrastructure investment, along with an expectation of “stronger growth in exports”, as two factors that would help to underpin GDP growth.
And while the RBA retained the view that “one continuing source of uncertainty is the outlook for household consumption”, it added the line that “growth picked up in late 2017”.
That suggests that concerns about the outlook for household spending levels, the largest and most important part of the Australian economy, are now less acute than just a few months ago.
However, in a sign that it’s not entirely comfortable on that front just yet, it noted that “household income has been growing slowly and debt levels are high”.
The other notable change from a domestic standpoint came from the bank’s assessment on current labour market conditions, specifically the recent increase in Australia’s unemployment rate.
The bank noted that while unemployment has “declined over the past year… [it] has been “steady at around 5.5% over the past six months”.
It said “a significant rise in labour force participation, particularly by women and older Australians”, had contributed to the recent stabilisation in the unemployment rate despite “strong growth in employment”.
Previously, it described the unemployment rate as having “declined”.
Despite the admission that unemployment has now held steady for several months, it repeated the view that “various forward-looking indicators continue to point to solid growth in employment in the period ahead… with a further gradual reduction in the unemployment rate expected”.
Despite the risks posed by unemployment remaining higher-for-longer, the bank retained the view that “wage growth appears to have troughed”.
“Notwithstanding the improving labour market, wages growth remains low,” it said. “This is likely to continue for a while yet, although the stronger economy should see some lift in wages growth over time.”
Outside of its commentary on household consumption and Australia’s labour market, its views on the domestic economy were largely unchanged, including for inflation, the housing market and the level of the Australian dollar.
Given the current set of circumstances, it all points to the RBA keeping interest rates unchanged for even longer than what many currently expect.
The full April monetary policy statement can be found here.