- The minutes of the RBA’s March policy meeting offered very little new information for markets.
- It remains optimistic about the Australian and global economy yet remains uncertain about the outlook for Australian household spending and wage growth.
- Until that uncertainty is resolved, interest rates are likely to remain unchanged.
The Reserve Bank of Australia (RBA) released the minutes of its March monetary policy meeting today to little fanfare, largely reflecting that nothing has really changed in recent weeks.
The bank remains optimistic on the outlook for the global economy, along with non-mining business investment and labour market conditions in Australia. However, as has been the case for several months, it remained “uncertain” about the outlook for household consumption, the largest and most important part of the Australian economy.
And it continued to warn that a higher Australian dollar “would be expected to result in a slower pick-up in economic activity and inflation than forecast”.
Nothing earth-shattering by any stretch, simply repeating what has been heard ad nauseum in recent months.
Of the 1,300 odd words within the March minutes, perhaps the most important, at least when it comes to the outlook for interest rates, came from the three paragraphs below (our emphasis in bold):
Employment had grown strongly and the unemployment rate had fallen over the preceding year. However, the improvement in overall conditions had not yet translated into a definitive pick-up in wages growth, which remained low. Forward-looking indicators suggested that spare capacity in the labour market would continue to decline gradually over 2018 and, as a consequence, wages growth was expected to rise gradually.
The housing markets in Sydney and Melbourne had slowed in preceding months and conditions in housing markets elsewhere had been relatively stable. Tighter credit standards had been helpful in containing the build-up of risk on household balance sheets. Housing credit growth had eased, particularly for investors. However, household debt levels remained high, which contributed to the uncertainty surrounding the outlook for consumption growth. Members agreed that household balance sheets still warranted careful monitoring.
The low level of interest rates over 2017 had played a role in reducing the unemployment rate and bringing inflation closer to target. Further progress on these goals was expected over the period ahead, but this process was likely to be gradual. Over 2018, GDP growth was expected to exceed potential growth and CPI inflation was expected to increase gradually to be a little above 2%.
Essentially, while the RBA is confident that stronger labour conditions will eventually lead to a gradual lift in wage and inflationary pressures, there’s still some degree of uncertainty as to whether that will take place.
And given the combination of high household indebtedness, a slowing housing market and weak wage growth, it is also uncertain as to whether the economy will grow as fast as its prior forecasts for “a little above 3% over the next two years”.
Given those uncertainties — all intertwined with one another — it suggests the RBA is in no rush to tweak current policy settings.
Until it is resolved, that will likely remain the case.
The full RBA minutes can be accessed here.
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