RBA kept cash rate unchanged at 0.75% as widely expected. It noted in the statement that given “the long and variable lags in the transmission of monetary policy”, the central bank was on hold to monitor developments, “including in the labour market”.
Though, it reiterated that due to both global and domestic factors, ” it was reasonable to expect that an extended period of low interest rates will be required”. RBA is also “prepared to ease monetary policy further” if needed.
Full statement below.
Statement by Philip Lowe, Governor: Monetary Policy Decision
At its meeting today, the Board decided to leave the cash rate unchanged at 0.75 per cent.
The outlook for the global economy remains reasonable. While the risks are still tilted to the downside, some of these risks have lessened recently. The US–China trade and technology disputes continue to affect international trade flows and investment as businesses scale back spending plans because of the uncertainty. At the same time, in most advanced economies unemployment rates are low and wages growth has picked up, although inflation remains low. In China, the authorities have taken steps to support the economy while continuing to address risks in the financial system.
Interest rates are very low around the world and a number of central banks have eased monetary policy over recent months in response to the downside risks and subdued inflation. Expectations of further monetary easing have generally been scaled back. Financial market sentiment has continued to improve and long-term government bond yields are around record lows in many countries, including Australia. Borrowing rates for both businesses and households are at historically low levels. The Australian dollar is at the lower end of its range over recent times.
After a soft patch in the second half of last year, the Australian economy appears to have reached a gentle turning point. The central scenario is for growth to pick up gradually to around 3 per cent in 2021. The low level of interest rates, recent tax cuts, ongoing spending on infrastructure, the upswing in housing prices and a brighter outlook for the resources sector should all support growth. The main domestic uncertainty continues to be the outlook for consumption, with the sustained period of only modest increases in household disposable income continuing to weigh on consumer spending. Other sources of uncertainty include the effects of the drought and the evolution of the housing construction cycle.
The unemployment rate has been steady at around 5¼ per cent over recent months. It is expected to remain around this level for some time, before gradually declining to a little below 5 per cent in 2021. Wages growth is subdued and is expected to remain at around its current rate for some time yet. A further gradual lift in wages growth would be a welcome development and is needed for inflation to be sustainably within the 2–3 per cent target range. Taken together, recent outcomes suggest that the Australian economy can sustain lower rates of unemployment and underemployment.
Inflation is expected to pick up, but to do so only gradually. In both headline and underlying terms, inflation is expected to be close to 2 per cent in 2020 and 2021.
There are further signs of a turnaround in established housing markets. This is especially so in Sydney and Melbourne, but prices in some other markets have also increased recently. In contrast, new dwelling activity is still declining and growth in housing credit remains low. Demand for credit by investors is subdued and credit conditions, especially for small and medium-sized businesses, remain tight. Mortgage rates are at record lows and there is strong competition for borrowers of high credit quality.
The easing of monetary policy this year is supporting employment and income growth in Australia and a return of inflation to the medium-term target range. The lower cash rate has put downward pressure on the exchange rate, which is supporting activity across a range of industries. It has also boosted asset prices, which in time should lead to increased spending, including on residential construction. Lower mortgage rates are also boosting aggregate household disposable income, which, in time, will boost household spending.
Given these effects of lower interest rates and the long and variable lags in the transmission of monetary policy, the Board decided to hold the cash rate steady at this meeting while it continues to monitor developments, including in the labour market. The Board also agreed that due to both global and domestic factors, it was reasonable to expect that an extended period of low interest rates will be required in Australia to reach full employment and achieve the inflation target. The Board is prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time.
US Ross: No big trade meetings with China, no deal signing scheduled
Risk aversion dominates the Asian markets following the steep decline in US overnight. Renewed concerns over US-China trade negotiations were the main driver behind the bearish moves. It’s not getting more unlikely that the phase one trade deal would be agreed in time to avert tariff escalation on December 15. That’s a big step back in expectations given that investors were hoping for some tariffs rollbacks just weeks ago.
US Commerce Secretary Wilbur Ross told CNBC yesterday that no high-level trade talks are scheduled before December 15. He said, “there’s no big meetings scheduled right now, and there certainly is no signing date scheduled.” He also noted that waiting until 2020 election to strike a trade deal would take away China’s ability to pressure the US.
“That takes off the table something that they may think gives them some leverage. Because once the election occurs… and he’s back in, now that’s no longer a distraction that can detract from our negotiating position,” Ross said. He also emphasized that “the president’s objective always has been to get the right deal independently of when or anything else like that. So his objectives haven’t changed. And if we don’t have a deal, he’s perfectly happy to continue with the tariffs as we have.”
His comment came just after President Trump said that “I have no deadline, no,” regarding the trade agreement phase one. “In some ways, I like the idea of waiting until after the election for the China deal. But they want to make a deal now, and we’ll see whether or not the deal’s going to be right; it’s got to be right.”
Politically, tensions between US and China will also likely intensify after House of Representatives on Tuesday overwhelmingly pass a bill to toughen the response to China’s crackdown on Uyghurs in Xijiang. The Uighur Act of 2019, passed by 407-1, was step up to the Senate version passed back in September. The bill requires the President to condemn abuses against Muslims and call for the closure of mass detention camps in the northwestern region of Xinjiang. It also calls for sanctions against senior Chinese officials who it says are responsible. Just last week, Trump signed the Hong Kong Human Rights and Democracy Act into law. Both drew fierce objections from China.