The RBA is calling out Trump's trade policy as a concern for the global outlook

Jeoffrey Maitem/Getty ImagesA US Coast guard ship and the USS Vandergrift in a naval exercise in the South China Sea.
  • Official interest rates have now been unchanged at 1.5% since August 2016.
  • That setting will likely remain until the RBA is confident unemployment is falling and inflation rising.
  • The bank is upbeat about unemployment and the Australian economy in general, suggesting they’re moving closer to those key goals.

The Reserve Bank of Australia (RBA) kept official interest rates unchanged at 1.5% in July, extending its record streak of policy inaction into a 21st consecutive meeting.

The last time the RBA moved rates was August 2016, a trend that looks set to continue for some time yet, based on the language in its July monetary policy statement.

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

The entire final paragraph of the statement was identical to June’s, conveying the message that until it’s confident enough that unemployment is falling and inflation rising, policy rates will remain unchanged for the foreseeable future.

On the latter — a decline in unemployment — the bank yet again struck an optimistic tone, suggesting that “the outlook for the labour market remains positive”.

“Strong growth in employment has been accompanied by a significant rise in labour force participation,” it said, seemingly showing no concern about the recent slowdown in hiring in official data.

It even singled out what was undoubtedly the strongest piece of labour market data seen in a while: last week’s job vacancy report, while overlooking other leading labour market indicators that weren’t nearly as strong.

“The vacancy rate is high and other forward-looking indicators continue to point to solid growth in employment,” it said.

“A gradual decline in the unemployment rate is expected, after being steady at around 5.5% for much of the past year.”

Like its glowing assessment of current labour market conditions, the Board also sounded more upbeat about the outlook for wage pressures.

While it said that “wages growth remains low” and will “likely to continue for a while yet”, it noted that “the rate of wages growth appears to have troughed and there are increasing reports of skills shortages in some areas.”

In June, it said there were “some” employers finding it difficult to attract suitable workers.

Again, another subtle hint that it’s growing more confident about a pickup in wages.

Keeping with that theme, the RBA remained upbeat about the Australian economy, suggesting that “GDP grew strongly in the March quarter”.

It also noted that non-mining business investment is continuing to increase, the only other major tweak it made to its assessment.

Once again, it said “one continuing source of uncertainty is the outlook for household consumption”, repeating that “household income has been growing slowly and debt levels are high”.

Given a lack of new information, and despite those subtle optimistic tweaks, the RBA left its view on inflation identical to those in June.

In something of a surprise, the bank dropped its warning that “an appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast”.

However, while it noted the Aussie had “depreciated a little”, it said it remained “within the range that it has been in over the past two years”, repeating the line from June.

Like most other things associated with the domestic economy, the bank expressed no concern about recent weakness in Sydney and Melbourne property prices.

“Conditions in the Sydney and Melbourne housing markets have eased, with prices declining in both markets,” it said.

However, it did strike a cautious tone on the recent slowdown in housing finance due in part to tighter lending standards.

“Housing credit growth has declined, with investor demand having slowed noticeably. Lending standards are tighter than they were a few years ago, with APRA’s supervisory measures helping to contain the build-up of risk in household balance sheets.

It added that “some further tightening of lending standards by banks is possible, although the average mortgage interest rate on outstanding loans has been declining for some time”.

As was the case last month, the reference towards average interest rates likely refers to the decline over the past year. The bank did not specifically mention the out-of-cycle mortgage rate increases delivered by some smaller banks in recent weeks.

So, if it wasn’t already, housing market data has taken on an increased importance on the outlook for interest rates.

Even with some caution towards the housing market, the rest of the bank’s commentary towards the domestic economy was largely upbeat, suggesting that it’s moving closer to achieving its inflation and unemployment goals and, eventually, an increase in official interest rates.

However, while its confidence about the domestic economy increased, the same could be said about the external environment with the bank pointing to trade tensions and higher short-term funding costs as two areas that were adding to uncertainty.

“One uncertainty regarding the global outlook stems from the direction of international trade policy in the United States. There have also been strains in a few emerging market economies, largely for country-specific reasons,” it said.

It also said that “the global economic expansion is continuing”, altering the view from June that it was “strengthening”.

It also noted that “short-term wholesale interest rates have increased over recent months”, referring to the factors that led some smaller lenders to increase variable mortgage rates in June.

“This is partly due to developments in the United States, but there are other factors at work as well.

“It remains to be seen the extent to which these factors persist.”

Put bluntly, it’s not sure whether higher wholesale funding rates will persist, increase or decline in the period ahead, adding an extra layer of uncertainty over the outlook for end rates for borrowers.

That, along with the increased concern over the global economy, all but offset improved optimism elsewhere in the statement, ensuring the market reaction to the statement was largely non-existent.

The full July RBA statement can be accessed here.

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