The minutes from the Reserve Bank of Australia’s (RBA) September policy meeting have been released, and the bank’s discussions were broadly in line with the market’s expectations.
The Australian dollar was little-changed in the wake of the release.
Despite that, in the bank’s outlook for monetary policy in September, committee members made specific mention of how continued strength in the Australian dollar could hamper growth.
“The appreciation of the Australian dollar over recent months, driven in part by a broad depreciation of the US dollar, was weighing on domestic growth and contributing to subdued inflationary pressure,” the bank said.
“A further appreciation of the Australian dollar would be expected to result in a slower pick-up in growth and inflation.”
The minutes from the meeting — which took place before last week’s bumper jobs report — also showed that the bank’s committee members remained cautious in their outlook for a pickup in wage growth.
Citing the most recent wage index data in August, they also noted that new enterprise bargaining agreements were being struck with lower wage increases than existing agreements.
“Members noted that these data were consistent with the Bank’s forecast for growth in wages to remain low for some time, before picking up gradually in response to the strengthening labour market,” the minutes said.
Despite that, the bank remains confident in its forecasts that wages and inflation will eventually pickup as continued jobs growth leads to a fall in underemployment.
“A gradual increase in growth in wages and inflation was expected as the spare capacity in the labour market was reduced and the economy continued to strengthen, supported by the low level of interest rates,” the bank said.
But citing the example of international markets, Capital Economics chief economist Paul Dales isn’t so sure.
Dales is still of the view that the RBA is being to optimistic in its medium-term growth projections, “given that labour markets in other economies have been stronger for longer and have not generated much wage growth”.
“For us, this poses a downside risk to the RBA’s consumption and GDP growth forecasts,” Dales said.
In assessing the key drivers of future economic growth, the minutes showed that the bank’s committee members appear satisfied with how the economy has transitioned away from the mining boom.
They highlighted strength in public infrastructure projects as a key growth area. That follows a $75 billion infrastructure spending pledge by the Turnbull government in this year’s budget.
Recent construction industry data also showed that the sector was in good shape, with strong demand for engineering jobs to work on large-scale civil infrastructure projects.
At the same time, the bank also noted that despite another rise in iron ore prices through the middle of this year, the latest price gains were unlikely to last.
After specifically mentioning that Sydney house-price growth was cooling in its policy announcement two weeks ago, the bank again made note of a recent divergence in the Sydney and Melbourne markets.
“There had been clearer signs of an easing in conditions in the Sydney market but less so in Melbourne, where prices had continued to grow strongly,” the RBA minutes said.
“Borrowing for housing had continued to outpace growth in incomes, although the composition had shifted towards owner-occupiers, with higher interest rates for investors in housing reflecting the ongoing effects of APRA’s recent measures to strengthen lending standards in this area.”
Taking all of the above into account, the RBA’s decision to keep rates on hold was based on maintaining a balance in monetary policy, given the competing forces of low inflation and high house prices.
Capital Economics’ Dales doesn’t expect that scenario to change anytime soon.
“We doubt rates will rise until late 2019, which would be a year later than the financial markets expect,” Dales said.