RBA holds rates steady, flags increased risks from abroad

  • The RBA kept Australia’s cash rate unchanged at 1.5% in April. It’s remained at that level since August 2016.
  • The bank maintained a neutral bias on policy, implying it’s not considering a change in the near-term.
  • However, outside of solid labour market conditions, it provided plenty of reasons as to why a lower cash rate may be warranted in the future.

The Reserve Bank of Australia (RBA) kept its cash rate unchanged at 1.5% in April, maintaining the period of policy stability that’s been in place since August 2016.

The result was widely expected by economists and financial markets.

Indicating the bank is unlikely to change policy settings in the near-term, the message in the final paragraph of the statement was much the same as what was communicated in March.

“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 it was appropriate to hold the stance of policy unchanged at this meeting.”

However, it added that “the Board will continue to monitor developments and set monetary policy to support sustainable growth in the economy and achieve the inflation target over time”.

That signals that while job market conditions remain firm, the RBA is unlikely to cut Australia’s cash rate further. However, if that changes, it also indicates a willingness to ease policy settings further.

Prior to today’s policy decision, some had speculated that the RBA may follow the lead from the Reserve Bank of New Zealand (RBNZ) by switching from a neutral to easing bias on the outlook for policy settings, signalling that it too may cut interest rates again.

It did not on this occasion.

That decision was underpinned by the view that the Australian labour market remains “strong” despite the sharp slowdown in the Australian economy late last year.

“There has been a significant increase in employment and the unemployment rate is at 4.9%,” it said. “The vacancy rate remains high and there are reports of skills shortages in some areas.”

The bank repeated that this should see wages growth lift gradually over time.

While the RBA’s assessment on current jobs market conditions remained upbeat, its commentary on the broader Australian economy was decidedly less optimistic in nature.

“The GDP data paint a softer picture of the economy than do the labour market data. GDP rose by just 0.2% in the December quarter to be 2.3% higher over 2018,” it said.

“Growth in household consumption is being affected by the protracted period of weakness in real household disposable income and the adjustment in housing markets. The drought in parts of the country has also affected farm output.”

The acknowledgement that growth was soft, and well below the level forecast by the bank, hints it will trim its GDP growth forecasts when next released in May, potentially paving the way for slower progress in lifting inflation and lowering unemployment in the period ahead.

The bank also indicated that the downturn in the housing market has spread beyond Sydney and Melbourne, and Perth and Darwin before them, noting the “adjustment in established housing markets is continuing, after the earlier large run-up in prices in some cities”.

Previously, the bank only named Sydney and Melbourne as locations where this adjustment was occurring.

Elsewhere, it’s views on inflation, commodity prices and the Australian dollar was similar to that communicated in March.

Internationally, it also struck a more cautious tone than in March, especially when it came to global trade.

“The outlook for the global economy remains reasonable, although growth has slowed and downside risks have increased,” it said. “Growth in international trade has declined and investment intentions have softened in a number of countries.”

Like the majority of the April statement, that commentary was dovish, providing plenty of reasons outside of domestic labour market conditions as to why easier policy settings may be warranted.

However, as has been the case for some time, the RBA continues to put faith in a continuation of firm job market conditions to help gradually lift wage and inflationary pressures in the years ahead. Until that changes, the RBA is likely to keep policy settings unchanged.

While that remains the case for now, based on its recent commentary, it doesn’t appear that it will need too much evidence of a softening in labour market to consider the need for cuts.

The full April monetary policy statement can be found here.