Home Central Banks Reserve Bank of Australia’s Monetary Policy – August 2017

Reserve Bank of Australia’s Monetary Policy – August 2017

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Written By: Richard Koch – Forex Focus

Key highlights of Australia’s central bank policy meeting and the economic outlook

The Reserve Bank of Australia in its seventh monetary policy meeting this year decided to leave the benchmark interest rate, or the cash rate, unchanged at 1.5 percent. The move was in line with market expectations, and according to the RBA’s statement, it was based on the situation of the financial markets in the country; interest rates are likely to remain at current levels for the rest of the year, and any possibility of a rate hike would only be looked at towards mid-2018. The key interest rates in Australia have remained unchanged since August 2016.

Following are the key highlights of the RBA’s press release and the quarterly monetary policy statement on the current condition of the Australian economy and the outlook for the future:

  • The perspective remains largely unchanged, with the Australian economy expected to grow at an annual pace of 3 percent over the next two years.

  • Business conditions in the country have improved and are at the highest points since 2008.

  • Capacity utilization has shown a steady rise in recent months.

  • Robust growth in hiring led to higher employment, spread across all the states in the country.

  • Unemployment rate expected to decline further in the near-term and could reach 5.5 percent by 2019. However, wage growth is likely to remain low.

  • Consumer inflation, which is currently under 2 percent, is expected to rise as the economy continues to grow. In addition, a surge in electricity and tobacco prices should lead to a higher CPI (consumer price index) number.

  • The housing market is registering uneven growth, with prices skyrocketing in some parts of the country while remaining subdued in other parts.

  • Housing credit for the quarter ending June 2017 remained stable at 1.6 percent, while business-credit growth registered an increase of 1.5 percent after declining 0.4 percent in the first quarter of 2017.

  • Interest rates on residential properties remain high, whereas rental income in most cities in the country is increasing gradually.

  • Household income is not keeping pace with housing debt, and the growth in mortgage debt is leading financial institutions to squeeze credit.

  • Building approvals have declined in certain areas over the last nine months due to lower demand from foreign investors and tighter bank credit.

  • The rise in public spending, especially on public infrastructure projects, is lending support to the economy.

  • Although commodity prices, such as for metals, have recovered, the price rise may not be felt in the country’s exports due to the terms of trade.

  • Investments in mining projects have dropped as the industry reaches its peak.

  • Exchange rates could play spoilsport as a higher Aussie could derail output and employment, subdue prices and slowdown economic activity.

  • The global economy is expanding at a robust pace although uncertainties remain.

  • High levels of debt in the markets of China, one of Australia’s largest trading partners, could lead to risks in the medium-term.

The following chart highlights the key interest rates in Australia since January 2011.

Source: RBA

Gross domestic product (GDP) growth in Australia expanded at a slower pace of 0.3 percent in the quarter ending March 31, 2017, compared to solid growth figures of 1.1 percent in the previous quarter, as exports shrunk by 1.6 percent and dwelling investment dropped by 4.4 percent, offsetting the rise in mining investment, which increased 3.7 percent during the first three months of the year. Compared to the year-on-year period, GDP growth expanded at 1.7 percent. The labour market continues to shine with around 165,000 full-time jobs created in 2017, leading to a fall in the unemployment rate, which declined to 5.6 percent by the end of June 2017. The unemployment levels in the country are currently at 0.5 to 0.75 percentage points above the central bank’s evaluation of full employment. However, the rise in employment has not resulted in a parallel wage growth, which has remained below 2 percent year-on-year, according to the wage price index (WPI)—more or less in line with some of the other major economies globally. The national minimum wage rate in Australia is decided by the Fair Work Commission (FWC) and the minimum wage per hour is fixed at $18.29 from July 1, 2017.

The Australian equity markets have largely underperformed their global peers, led by declines in the banking sector after the Parliament passed the “major bank levy bill 2017” for banks with a liability of more than $100 billion. The bill, which was passed in June 2017, came into effect from July 1, 2017 with the government expected to rake in about $1.5 billion in taxes from the levy every year. In addition, the financial sector was downgraded by credit-rating agencies Standard & Poor’s and Moody’s due to the large accumulation of household debt, and this has led to an overall tightening in bank lending, thereby putting the brakes on fresh loans.

The Australian dollar, which was trading above 0.8000 to the greenback, slid about 2.5 percent in the two weeks following the RBA’s monetary-policy decision. The currency pair has since recovered about half its losses and was seen trading in the 0.7900-0.7950 range.

 

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1 comment

Pewep FX September 18, 2017 - 3:55 pm

Interest rates are begging to be risen, the current house price rises are unsustainable and this will be yet another CB who react to a price correction rather than take the necessary moves to have a soft landing.

Reply

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