More of the same from the RBA

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  • The Reserve Bank of Australia (RBA) kept interest rates steady for a 20th consecutive meeting in June. It looks set to remain that way for some time yet.
  • The bank’s commentary on Australian labour market conditions was less confident than in prior months.
  • It noted new concerns over the “direction of international trade policy in the United States and economic developments in a few emerging market economies”.

The Reserve Bank of Australia (RBA) kept interest rates steady in June, an outcome widely expected by economists and markets.

The cash rate has remained at 1.5% for 20 consecutive meetings, the longest stretch on record without a move in either direction.

That policy inaction looks set to remain in place for some time yet with the board making few significant changes in the policy statement.

“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 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.”

As well-documented in prior statements and commentary from Board members, the cash rate will likely remain steady until they are confident enough that faster economic growth and lower unemployment brings underlying consumer price inflation (CPI) back towards the mid-point of its 2-3% medium-term target.

At a shade under 2%, underlying CPI is still a fair distance away from the level where the bank will begin to consider normalising policy settings.

Like the outlook for official interest rates, its views on the Australian economy were similar to those in May.

“The recent data on the Australian economy have been consistent with the Bank’s central forecast for GDP growth to pick up, to average a bit above 3% in 2018 and 2019,” the RBA said, referring to recent GDP inputs for the March quarter.

It added that household consumption remains a “continuing source of uncertainty”, repeating the view that has been in place for several months.

However, it removed the line that stronger economic growth “should see some reduction in spare capacity in the economy”, fitting with a recent pickup in several in private sector business surveys.

On current labour market conditions, it noted that unemployment had been “little changed at around 5.5% for much of the past year”, reflecting recent data from the ABS.

It removed the line that unemployment rate had “declined over the past year”. It also dropped the view that labour market conditions were “improving”, something it previously said in May.

Despite those dovish tweaks, it’s views on the outlook for wages and inflation were largely identical to those offered a month ago.

Both are expected to increase “gradually”.

It’s commentary on the Australian dollar largely reflected recent market moves, dropping the view that it had “depreciated a little recently”.

It retained the warning that “an appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast”.

On Australia’s housing market, an area that has dominated discussion in recent months, it made said that Sydney and Melbourne’s markets had “slowed” with nationwide measures of housing prices “little changed over the past six months.”

That was identical to the wording offered a month ago, and suggests it’s not yet concerned by ongoing price declines in Sydney and Melbourne, yet.

Fitting with recent data on home loan lending and private sector credit, it added that “housing credit growth has slowed over the past year, especially to investors”.

However, despite the prospect of even tighter lending standards, and elevated money market rates creating margin pressures for lenders, it noted that “the average mortgage interest rate on outstanding loans is continuing to decline”.

This could reflect the ongoing switch away from interest-only to variable rate mortgages by borrowers as a result of recent regulatory changes from APRA.

Outside Australia, the bank made no changes to its view on the global economy, stating it had “strengthened over the past year”.

However, it made several tweaks to its commentary on financial markets, adding there are now “concerns about the direction of international trade policy in the United States and economic developments in a few emerging market economies”.

It also noted there has been some “widening of corporate credit spreads” despite a recent reduction in bond yields in several advanced economies.

Creating doubt as to whether average mortgage mortgage rates for existing borrowers will continue to decline, it acknowledged that “higher rates in the United States have flowed through to higher short-term interest rates in a few other countries, including Australia”.

Some have speculated that this could lead to out-of-cycle rate increases for mortgage holders should it persist.

Given an increase in uncertainty abroad, and slow progress in lowering unemployment and boosting wage and inflationary pressures at home, it still appear a long way off before the RBA will be in a position to consider, let alone increase, the cash rate.

In the interim, data on unemployment, wages, inflation and the housing market will remain key for the policy outlook.

The full June statement can be accessed here.

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