RBA holds rates, notes slowdown in jobs market

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  • The RBA kept interest rate unchanged at 1.5% in May, extending its record-breaking streak of policy inertia into a 19th consecutive meeting.
  • It acknowledged that Australian employment growth has slowed recently, but it still expects unemployment to decline in the period ahead.
  • The bank is unlikely to make major changes to its forecasts for GDP growth, unemployment and inflation in Friday’s Statement on Monetary Policy (SoMP).

The Reserve Bank of Australia (RBA) kept interest rate unchanged at 1.5% in May, extending its record-breaking streak of policy inertia into a 19th consecutive meeting.

And that streak looks set to extend for some time yet with the bank retaining a clear neutral policy bias in the final paragraph of the 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 this into account, it said “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”.

That was identical to what was previously communicated in April, and suggests that official interest rates are unlikely to change until the bank is confident enough that stronger labour market conditions will lead to a pickup in inflation.

On current labour market conditions, the bank struck a more cautious tone than that offered it April, noting that while employment had grown strongly over the past year, it had “slowed over recent months”.

Largely repeating what it said a month earlier, it acknowledged that while unemployment had declined over the past year, it had “been steady at around 5.5% for some months”.

Previously, it stated that unemployment had been steady over the past six months.

Looking ahead, it repeated 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”.

The latter suggests that while it may up its forecast for unemployment to 5.5% at the end of the June quarter in Friday’s Statement on Monetary Policy (SoMP), it still sees unemployment moving back towards the levels that have typically lead to an acceleration in wage pressures.

On that topic, it said a stronger economy “should see some lift in wages growth over time”, repeating the line from April.

With wage growth set to gradually increase, the RBA also sees inflationary pressures slowly building over time.

“The recent inflation data were in line with the Bank’s expectations, with both CPI and underlying inflation running marginally below 2%,” it said, referring to Australia’s March quarter CPI report released last week.

It previously described inflation as being a “a little” below 2%.

That hints that it may up its forecast for underlying CPI from 1.75% to 2% in Friday’s SoMP.

However, despite a small lift in underlying inflationary pressures in the year to March it repeated that “inflation is likely to remain low for some time, reflecting low growth in labour costs and strong competition in retailing”.

“A gradual pick-up in inflation is… expected as the economy strengthens. The central forecast is for CPI inflation to be a bit above 2% in 2018,” it said, repeating the view offered in April.

From a broader perspective, the RBA also indicated that its forecasts for real GDP growth over the next couple of years are likely to be much the same as those previously offered in February.

“The Bank’s central forecast for the Australian economy remains for growth to pick up, to average a bit above 3% in 2018 and 2019,” it said, mirroring what it said prior to the release of its previous SoMP.

In another sign that its confident that unemployment will gradually fall and inflationary pressures will gradually rise, it added that “this should see some reduction in spare capacity in the economy”.

Elsewhere, its commentary on the Australian economy was identical apart from the removal of the line that exports had been hindered by one-off factors at the end of 2017.

Nor did it see a need to change its views on the Australian housing market, keeping its commentary identical to that offered in April.

“The housing markets in Sydney and Melbourne have slowed,” it said. “Nationwide measures of housing prices are little changed over the past six months, with prices having recorded falls in some areas.”

On the Australian dollar, it noted that it had “depreciated a little recently”. However, it again warned that a higher exchange rate “would be expected to result in a slower pick-up in economic activity and inflation than currently forecast”.

Fitting with the broader theme seen throughout the May policy statement, the RBA also made minimal changes to its views towards the global economy or current financial conditions.

Along with indicating that official interest rates are unlikely to move until its confident enough that wage and inflationary pressures will build, today’s statement suggests the RBA will also make minimal changes to its updated economic forecasts this Friday.

As such, until the data suggests otherwise, interest rates are likely to remain at current levels for the foreseeable future.

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