The Reserve Bank of Australia (RBA) left interest rates unchanged at 1.5% at its September monetary policy meeting, an outcome that was widely expected by economists and markets alike.
And, has been the case for some time now, that appears unlikely to change anytime soon with the bank delivering a neutral bias on the outlook for interest rates.
“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 said.
It again noted that “the low level of interest rates is continuing to support the Australian economy”, reinforcing the view that rates are going nowhere fast.
With rates on hold and likely to stay that way for some time yet, all of the interest from today’s meeting was on the accompanying monetary policy statement, especially the bank’s view on Australia’s housing and labour markets, as well as the broader economy.
While similarly optimistic to what was previously conveyed, there was a surprise or two.
For one, the bank singled out that Sydney’s housing market is showing signs of slowing.
“Housing prices have been rising briskly in some markets, although there are signs that conditions are easing, especially in Sydney,” it said, adding that “conditions in the housing market continue to vary considerably around the country.”
That tweak followed the release of data from CoreLogic last week that revealed prices in Australia’s largest and most expensive housing market were flat in August, continuing to slow from the levels seen earlier in the year.
The acknowledgement suggests it’s becoming more confident that measures introduced by APRA to cool housing market conditions in late March are working.
“There has also been some tightening of credit conditions following supervisory measures to address the risks associated with high and rising levels of household indebtedness,” it said.
Still, despite signaling out of Sydney property market, it repeated that “growth in housing debt has been outpacing the slow growth in household incomes”, hinting that it’s still far from satisfied that financial stability concerns have been contained.
Outside of housing, another sector that featured heavily in the bank’s discussion was Australia’s labour market.
As was the case in August, the RBA remained optimistic on not only what has happened, but where things are heading.
“Employment growth has been stronger over recent months and has increased in all states,” it said. “The various forward-looking indicators point to solid growth in employment over the period ahead. The unemployment rate is expected to decline a little over the next couple of years.”
Previously, the RBA said forward-looking indicators pointed to “continued growth” in employment over the period ahead.
And, fitting with strengthening labour market conditions, it noted that while wage growth “remains low”, pressures are likely to build modestly in the period ahead.
“This is likely to continue for a while yet, although stronger conditions in the labour market should see some lift in wages growth over time,” it said.
With wage pressures likely to pickup modestly, it also noted that inflation — while low — “is expected to pick up gradually”.
On the broader Australian economy, it confirmed that recent data was consistent with its expectation that growth will gradually pick up over the coming year.
“The decline in mining investment will soon run its course. The outlook for non-mining investment has improved recently and reported business conditions are at a high level. Residential construction activity remains at a high level, but little further growth is expected,” it said.
The upgrade for non-mining investment followed the release of Australia’s June quarter capital expenditure report last week, revealing a large increase in expected investment in the current financial year.
Despite strength in retail sales and improved labour market conditions, it again warned that “low growth in real wages and high levels of household debt are likely to constrain future growth in spending”.
That continues to be a major area of uncertainty for the RBA, and goes someway to explaining why it’s in no rush to lift interest rates. Unless the household sector starts to strengthen, it’s unlikely that recent momentum in the economy will last.
Along with the outlook for household spending, another reason the board is in no rush to lift rates is the current strength in the Australian dollar.
“An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast,” it said, repeating the line it used in August.
Outside of Australia’s economy, the bank’s assessment on global economic conditions was repeated almost word-for-word.
“Conditions in the global economy are continuing to improve. Labour markets have tightened further and above-trend growth is expected in a number of advanced economies, although uncertainties remain,” it said.
It also noted that “financial markets have been functioning effectively and volatility remains low.”
There has been negligible market reaction to the release of the September statement, with much of the commentary similar to that seen in recent months.
As has been the case for some time, further developments in Australia’s housing and labour markets, along with economic conditions abroad, will likely determine if and when the board sees fit to begin normalising interest rates.
The full September statement can be accessed here.
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