RBA leaves rates on hold but its confidence in the jobs market is growing

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The Reserve Bank of Australia (RBA) produced few surprises at its October monetary policy meeting, keeping the cash rate unchanged at 1.5% for a fourteenth consecutive month.

And it looks like that trend will continue for some time yet with the board yet again delivering a neutral bias on the outlook for interest rates in the final paragraph of the statement.

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

“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.”

That was identical to what was communicated in September, and suggests the RBA is in no rush to change things as they currently stand.

However, while rates are unlikely to change anytime soon, it’s clear that the board is becoming more confident on the outlook for Australia’s labour market.

“Employment has continued to grow strongly over recent months,” the statement read. “Employment has increased in all states and has been accompanied by a rise in labour force participation.”

One month ago the board said that employment growth had “been stronger over recent months”. The line about labour force participation increasing was also new, hinting that stronger labour market conditions are encouraging more Australians to enter the labour market.

‘Only gradually’

However, despite strength in various forward-looking labour market indicators, something the board says points “to solid growth in employment over the period ahead”, it added that the unemployment rate is expected to decline “only gradually over the next couple of years.”

In September it said that the unemployment rate was expected to decline “a little over the next couple of years”.

With more Australians participating in the labour force, the task of lowering the unemployment rate will be a slow one in other words, even if employment growth remains solid.

Indeed, reflecting the likelihood of slow progress on that front, it said that “wage growth remains low”, adding that “this is likely to continue for a while yet, although the stronger conditions in the labour market should see some lift in wage growth over time”.

This was unchanged from the view offered in September.

On the housing market, another key area for policy consideration, the board yet again signaled out Sydney for attention, noting that “in Sydney, where prices have increased significantly, there have been further signs that conditions are easing”.

That statement likely reflects recent data showing that prices in Australia’s largest and most expensive city fell in September following an unchanged reading in August, according to data released by CoreLogic.

Outside of Sydney, it said that “conditions continue to vary considerably around the country”, mirroring what was communicated in September.

“Housing prices have been rising briskly in some markets, while in others they have been declining,” it said.

Partially contributing the slowdown in Sydney, the board also touched upon recent efforts from Australia’s banking regulator, APRA, to reduce the level of investor activity in Australia’s housing market.

‘For some time’

“Following some tightening in credit conditions, growth in borrowing by investors has slowed a little recently,” the bank said.

However, it added that “growth in housing debt has been outpacing the slow growth in household incomes for some time”.

In September it said that “growth in housing debt has been outpacing the slow growth in household incomes”. The addition of “for some time” suggests the RBA is not completely satisfied about curtailing financial stability risks that still exist within the housing market.

On the Australian economy more broadly, the board retained an optimistic outlook on where things are currently heading.

“Over recent months there have been more consistent signs that non-mining business investment is picking up,” it said, adding that “a consolidation of this trend would be a welcome development”.

The addition of that second line suggests upcoming capital expenditure and business confidence reports will play a crucial role in determining where interest rates head next.

It also noted business conditions “are at a high level and capacity utilisation has risen”. It also pointed to a “large pipeline of infrastructure investment” as supporting the economic outlook.

However, it again cautioned on the outlook for the household sector, acknowledging that “slow growth in real wages and high levels of household debt are likely to constrain growth in household spending”.

Following recent weakness in retail sales reports, it also dropped the line that they had “picked up recently”.

Like business investment, the health of household spending will also play a key role in determining the outlook for monetary policy.

Outside of those areas, the language used in relation to the Australian dollar and inflation outlook was largely unchanged.

On the Aussie, it said that “an appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast”, unchanged from the view communicated in September.

It also noted that inflation “remains low and is expected to pick up gradually as the economy strengthens” also identical to that conveyed a month ago.

Outside of Australia, it noted that “conditions in the global economy have improved”, a small tweak on the view presented in September that conditions were “continuing to improve”.

That implies that things haven’t improved any further over the month, at least in the RBA’s opinion.

However, the optimistic overtones were still maintained.

“Labour markets have tightened and above-trend growth is expected in a number of advanced economies, although uncertainties remain,” the board said.

Reflecting recent price movements, it dropped the reference to commodity prices having “risen recently”, suggesting instead that “Australia’s terms of trade are expected to decline in the period ahead but remain at relatively high levels”.

Its views elsewhere were largely unchanged.

“Wage growth remains low in most countries, as does core inflation,” it said, adding that headline inflation rates are generally lower than at the start of the year, largely reflecting the earlier decline in oil prices.”

Outside of a few tweaks to the commentary, the view presented by RBA remains very much the same.

Its confidence towards the outlook for the Australian economy remains, and is slowly building, although it’s still likely to be some time yet before it sees the need to lift official interest rates.

Developments in Australia’s housing and labour markets, the outlook for business investment, along with movements in the Australian dollar, will likely determine the timing as to when and if that takes place.

The October monetary policy statement can be accessed here.

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