Home Central Banks RBA Leaves Cash Rates Unchanged at 1.5 Percent

RBA Leaves Cash Rates Unchanged at 1.5 Percent

by fffp12

A review of the monetary-policy meeting in November and expectations for December.

The Reserve Bank of Australia (RBA) left key interest rates on hold at the conclusion of its monetary-policy meeting on November 7, 2017. The cash rate, or the market interest rate on overnight funds, is considered to be the benchmark interest rate that influences other rates in the economy and was last changed in August 2016, when the RBA lowered rates from 1.75 to the current 1.5 percent.

Source: RBA website

In the media release that followed the monetary-policy decision, Governor Philip Lowe said that the Australian economy is expected to expand at an average annual rate of 3 percent over the next few years, in line with the central bank’s earlier forecast. However, consumer inflation in the country, which continues to remain below 2 percent, is a major cause of concern for the central bank as slow growth in household income has led to an increase in retail-debt levels and a decline in consumer spending. In addition, rising competition, especially in the retail sector, has put a lid on output inflation, resulting in prices lingering below the central bank’s projected target of 2-3 percent. Also, a 6-percent appreciation in the Australian dollar versus the greenback this year has contributed to downward price pressures; and if the Australian currency continues to rise, the central bank is contemplating slower growth in economic activity and inflation. The RBA also stated that current interest rates will lend support to the Australian economy and help in achieving a higher inflation target over the medium-term.

The central bank also released its quarterly monetary-policy statement a couple of days after the monetary policy committee’s (MPC’s) meeting. Following are some of the key highlights of the policy statement with respect to the Australian economy:

  • The bank predicts the country’s economy to grow at a robust pace over the next two years as it adjusts from a sharp fall in investments in the mining sector to make a gradual change to a non-mining economy.

  • Rise in headline inflation, which is currently below 2 percent, is led by tobacco and electricity prices with cost pressures on newly constructed homes being a recent addition. The central bank expects inflation numbers to increase gradually and touch 2-21/4 percent by the end of the forecast period.

  • Although the unemployment rate is expected to decline further, there are expectations of ongoing spare capacity in the labour markets.

  • Uncertainties surrounding the outlook for inflation will largely depend on the tightening of labour markets, growth in wages and speed at which labour costs lead to higher inflation numbers.

  • Business investment, especially in the non-mining sector, has exceeded expectations, with the future outlook continuing to remain positive.

  • Annual wage growth has averaged around 2 percent in the last few quarters, with average earnings edging lower as industries shift their employment composition towards low-paid labour.

  • Peak in dwelling investment could lead to an expansion in supply, which could negatively impact housing prices and rental income in certain areas.

  • Credit growth in the housing sector has eased a bit to help address concerns and risks in household debt, which remains at elevated levels in comparison to household income.

On its assessment of the global economy, the statement on monetary policy was upbeat on the growth prospects of most major economies, although they remained cautiously optimistic about China due to a decline in the working-age population in the country and the lack of policy accommodation by the government to support economic growth at current rates.

With the Reserve Bank of Australia poised to meet for one last time this year on December 5, here’s a look at the outcomes of some leading indicators following the RBA monetary-policy meeting in November:

  • Bank lending on home loans dropped 2.3 percent month-on-month in September, confirming the central bank’s view on tighter credit policies for households.

  • Westpac Consumer Confidence Index declined by 1.7 percent to 99.7 in November from 101.35 in October on the back of a sharp decline in anticipated economic conditions in the near future.

  • Seasonally adjusted unemployment rate slipped to 5.4 percent in October, the lowest since February 2013, and from 5.5 percent in September, mostly led by an increase in the part-time workforce.

  • New vehicle sales rose at an annualised pace of 1.0 percent in October after falling 0.8 percent the previous month. The rise was primarily due to a 1.0-percent growth in passenger vehicles sales, which offset the 1.6-percent decline in other vehicles.

The dovish statements from the Reserve Bank of Australia following the November MPC meeting and the outcome of the recent economic announcements are clear signs that the central bank may not be ready to hike cash rates in the near future. Weakening consumer confidence, high household debt coupled with low wage growth, decline in investment lending on new homes and a fall in inflation expectations for the forthcoming 12 months are all adding to the negative outlook as far as interest-rate increases are concerned. A large number of market experts are also of the view that any changes in interest rates will take place only in the latter half of 2018, with a few of them even suggesting a couple of hikes next year. However, for that to happen, the present pace of economic growth needs to be sustained, existing rate of employment has to be upheld, and household income should increase to levels that drive consumer confidence—thereby giving rise to spending that will eventually lead to higher consumer prices, one of the main objectives for a rate increase by the policymakers of Australia’s central bank.

 

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