Written By: Adrian Moore – Forex Focus
Key takeaways from the Reserve Bank of Australia’s MPC meeting in September.
The Reserve Bank of Australia (RBA) left key interest rates unchanged at 1.5 percent following its recent monetary-policy meeting on September 5. The outcome of the monetary-policy meeting was in line with market expectations, although there were modest expectations of a rate hike following the recent economic data that pointed to robust growth in the Australian economy, led by a strong labour market, enthusiastic household spending and robust business conditions.
Following are some of the positives and negatives of the monetary-policy statement that followed the interest-rate announcement.
- Economic growth in Australia is in line with the central bank’s expectations and is likely to expand further in the year ahead.
- Business conditions are robust, with investments in non-mining sectors gathering pace, offsetting the decline in mining investment.
- Growth in residential construction activity is likely to expand further.
- Recent data points to retail sales picking up.
- Rises in employment levels are reported across the country, with indications of further growth going forward.
- Strong labour-market conditions could lead to increases in wage growth.
- Slow growth in real wages coupled with rising household debt could dampen consumer spending.
- Inflation is currently low, although it is expected to rise as the economy continues to expand.
- Slow growth in rental income.
- Early signs of prices easing in the housing market.
- High interest rates on residential properties.
- Growth in housing debt rising faster that household income.
- High household debt leading to credit tightening.
- Recent strength in the Australian dollar could impact output and employment, leading to price pressures.
With reference to the global economy, the central bank stated that conditions in the major economies are improving, and with labour markets tightening, the future outlook points to above-trend growth. The bank also made mention of China, Australia’s largest international trading partner, stating that the country’s economy is banking on spending on infrastructure and property construction despite high levels of debt.
Australia’s trade with China exceeded $100 billion in 2016, with exports to the Asian giant accounting for more than 30 percent of the global total. The country’s trade surplus with China is backed by exports of iron ore, coal and gold, which contributes more than two-thirds of the overall trade between the two countries.
Consumer prices in Australia increased at a modest 0.2-percent pace in the quarter ending June 2017, the lowest in the last five quarters, leading to a fall in the annual rate of inflation to 1.9 percent in the second quarter as costs of housing, transport and financial services increased at a slower pace, offsetting gains in food, health and education. The decline follows a 2.1-percent rise in consumer inflation in first quarter 2017, the highest in two and a half years.
In the minutes of September’s meeting made public on the 19th, members noted that:
- Labour conditions in the country improved with the availability of spare capacity, and forward indicators suggested further improvement in the labour market.
- Growth in full-time employment improved significantly in July compared to the same time last year.
- Unemployment rates in Queensland and Western Australia remained high, in spite of a decline in mining investments.
- Wage growth could remain low for a while, with the pattern broadly mirroring employment growth.
- Healthcare and education sectors commanded higher wages compared to mining and retail.
- Dwelling investment was mixed, with Western Australia reporting a fall in investment, while in New South Wales and Victoria investments remained at elevated levels.
- Housing prices were mixed, and rises in rentals remained low across most cities.
- Although retail sales expanded in the June quarter, nominal retail sales registered a modest rise.
- Profits in the mining sector remained elevated despite slipping in the June quarter, while profits in non-mining activity registered a robust rise compared to a year earlier.
- Growth in housing credit remained stable, with reports of stronger lending to owners offsetting a fall in lending to investors.
- Australia’s corporate sector reported higher profits compared to a year earlier, with resource companies leading the pack following a rise in commodity prices.
Delving into the economic conditions globally, the policymakers were of the view that:
- Economic growth continues to expand in spite of consumer prices remaining subdued.
- Gross domestic product (GDP) growth in the top three economies picked up in the second quarter of 2017, led by a rise in business investment and household consumption.
- Consumption growth remained strong as labour markets improved substantially.
- Unemployment rates in the United States and Japan were below estimates of full employment, with the eurozone reporting spare capacity.
- Wage growth remained subdued, leading to a decline in core inflation.
- Spreads in corporate bonds versus sovereign bonds were at their lowest since the start of the global financial crisis in 2008.
With the RBA pushing for an annual inflation target of 2 to 3 percent, the prevailing economic growth in the country is not going to move the central bank, especially with inflated levels of household debt. The minutes of the September meeting clearly underline that the current cash rate in Australia will continue to remain at 1.5 percent going into 2018, as the bank balances risks associated with high household debt in a low-inflation environment.