Central Bank Views

RBA Left Policy Rate At 1.5%, More Upbeat Over Growth And Inflation Outlook


In its first meeting in 2018, RBA maintained the cash rate unchanged at 1.5%. The decision had been widely anticipated. As suggested in the accompanying statement, the central bank continued to see positive economic developments both globally and at home. Policymakers have turned slightly more upbeat over the domestic growth outlook, projecting GDP to expand 'a bit above 3% over the next couple of years'. Meanwhile, RBA revealed that the central forecast for CPI is 'a bit above 2% in 2018. This marks a more hawkish tone when compared with December’s language. While the job market has improved a lot, with the unemployment rate falling to the lowest level in 4.5 years, wage growth has remained lackluster. This has raised concerns over household expenditure.

Ahead of the quarterly Statement of Monetary Policy, RBA has upgraded its assessment over the growth and inflation outlook. it noted that the central forecast for the Australian economy is for 'GDP growth to pick up, to average a bit above +3% over the next couple of years', as supported by the data over the summer. It added that 'business conditions are positive and the outlook for non-mining business investment has improved'. The most worrisome area is 'household consumption' which has been hampered by slow growth in household incomes and elevated debt levels. In December, policymakers noted that GDP is expected to grow by 'around 3% over the next few years'. On inflation, policymakers retained the view of low inflation with 'both CPI and underlying inflation running a little below 2%. While seeing inflation stay low 'for some time, reflecting low growth in labour costs and strong competition in retailing', RBA expects 'a gradual pick-up' as helped by the strong economy. The central bank noted that the central forecast for CPI inflation is 'a bit above 2% in 2018'. At the December meeting, policymakers noted that inflation remained low and the central forecast was 'for inflation to pick up gradually as the economy strengthens'.

On the monetary policy outlook, RBA retained the view that 'the low level of interest rates is continuing to support the Australian economy'. It added at this meeting that 'further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual'. The market has priced in higher chance for a first rate hike in 2H18.