The RBA doesn’t look like it’s in a rush to lift interest rates


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

“The low level of interest rates is continuing to support the Australian economy,” the bank said in the key final paragraph of the statement.

“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.”

It added the line that “further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual,” indicating that while it is growing increasingly confident that inflationary pressures are building, any pickup is likely to be modest in scale.

That suggests that while the bank thinks the next move in interest rates is likely to be higher, not lower, any increase in rates will be slow and unlikely in the near-term.

On the inflation outlook specifically, the bank said it was “likely to remain low for some time, reflecting low growth in labour costs and strong competition in retailing”.

Despite the headwinds created by weak wage growth and intense competition in the retail sector, it said “a gradual pick-up in inflation is… expected as the economy strengthens”.

It added that it expects “CPI inflation to be a bit above 2% in 2018”.

In its forecasts offered in November, the RBA had headline CPI rising to 2.25% by the end of the year. That suggests there’s unlikely to be any major changes in its new forecasts when they are released in its quarterly Statement on Monetary Policy (SoMP) on Friday.

Despite recent strength in the Australian dollar — something that puts downward pressure on import prices — the RBA refrained from talking down the currency, noting that the Aussie “remains within the range that it has been in over the past two years”.

However, in a shot across the bows to those looking for further strength in the currency, 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”.

Suggesting that it will make few changes to its GDP growth in Friday’s SoMP, it noted that growth was expected to pick up “to average a bit above 3% over the next couple of years”.

That’s largely in line with its previous forecasts offered three months ago.

“The data over the summer have been consistent with this outlook,” it said.

“Business conditions are positive and the outlook for non-mining business investment has improved. Increased public infrastructure investment is also supporting the economy.”

Despite recent strength in retail sales and consumer confidence, it again pointed out the fragility of Australia’s household sector — the engine room of the Australian economy.

“One continuing source of uncertainty is the outlook for household consumption,” it said, repeating the line from its December statement. “Household incomes are growing slowly and debt levels are high.”

Like its assessment for the broader economy, its views on Australia’s labour and housing markets was similar to that communicated two months ago.

And of what changes there were, they largely reflect what has been seen in recent economic data.

On the labour market, it said “employment grew strongly over 2017 and the unemployment rate declined, adding that “employment has been rising in all states and has been accompanied by a significant rise in labour force participation”.

“Significant” was added from the December statement, suggesting that strong growth in the size of Australia’s labour force may created headwinds for lowering the unemployment rate and helping to boost wage pressures.

Fitting with that view, it repeated that “various forward-looking indicators continue to point to solid growth in employment over the period ahead, with a further gradual reduction in the unemployment rate expected”.

It also noted that despite the recent strength in labour market, it has, as yet, failed to translate to a meaningful pickup in wage pressures.

“Notwithstanding the improving labour market, wage growth remains low,” it said.

“This is likely to continue for a while yet, although the stronger economy should see some lift in wage growth over time”.

It repeated “there are reports that some employers are finding it more difficult to hire workers with the necessary skills”, something that would normally translate to broader wage pressures should the labour market continue to tighten.

On the housing market — something that has captured many headlines over summer — it’s commentary was largely reflective of recent trends in price data.

“Nationwide measures of housing prices are little changed over the past six months, with prices having recorded falls in some areas,” it said.

It added: “tighter credit standards have also been helpful in containing the build-up of risk in household balance sheets”, hinting that it’s pleased with recent macroprudential measures introduced by APRA.

This suggests the bank sees no need to tighten macroprudential measures further, at least in the short term.

Following recent upgrades to growth from the IMF and other forecasters, the bank offered a glowing assessment on the current state of the global economy.

“There was a broad-based pick-up in the global economy in 2017,” it said.

“A number of advanced economies are growing at an above-trend rate and unemployment rates are low. Growth has also picked up in the Asian economies, partly supported by increased international trade.”

On China, Australia’s largest trading partner, it described growth as “solid”, acknowledging that “authorities [are] paying increased attention to the risks in the financial sector and the sustainability of growth”.

With global growth accelerating and labour market conditions continuing to strengthen, it also expressed confidence that this would “likely see inflation increase over the next couple of years”.

Linked to the outlook for inflation, it expressed little concern about the recent spike in financial market volatility.

“Long-term bond yields have risen but are still low,” it said.

“As conditions have improved in the global economy, a number of central banks have withdrawn some monetary stimulus.

“Financial conditions remain expansionary, with credit spreads narrow.”

There has been very little reaction in markets to the release of the February statement, underlining that much of the commentary was similar to that offered two months ago.

The RBA thinks that Australian inflationary pressures are likely to build, but unless that occurs faster than what it currently expects, there’s little need to deliver a preemptive increase in rates.

Rate rises look like they’re coming, just not for some time yet.

The full February monetary policy statement can be accessed here.