RBA left cash rate unchanged at 1.50% today as widely expected. The message of the accompanying statement is largely unchanged. RBA maintained the central scenarios of growth, inflation, employment outlook. And continued to expect the “gradual” progress of reducing unemployment and inflation returning to target.
The central back acknowledged that “economy slowed over the second half of 2018”. But it maintained the “central scenario” is still to grow by around 3% this year. The outlook is supported by “rising business investment, higher levels of spending on public infrastructure and increased employment.” Inflation remains “low and stable”. The central scenario is for underlying inflation to be at 2% in 2019 and 2.25% in 2020. Labor markets remains “strong” and further decline in unemployment rate to 4.75% is expected over the next couple of years.
Main domestic uncertainty remains the “strength of household consumption in the context of weak growth in household income and falling housing prices in some cities.” But RBA expects household income growth to pick-up and support spending over the next year. On housing markets, it’s noted that adjustment in Sydney and Melbourne is continuing. Conditions remains “soft” in both markets with low rent inflation. Credit demand by investors slowed noticeably. And growth in owner-occupiers eased further.
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 1.50 per cent.
The global economy grew above trend in 2018, although it slowed in the second half of the year. The slower pace of growth has continued into 2019. The outlook for the global economy remains reasonable, although downside risks have increased. The trade tensions remain a source of uncertainty. In China, the authorities have taken further steps to ease financing conditions, partly in response to slower growth in the economy. Globally, headline inflation rates have moved lower following the earlier decline in oil prices, although core inflation has picked up in a number of economies. In most advanced economies, unemployment rates are low and wages growth has picked up.
Overall, global financial conditions remain accommodative. They have eased recently after tightening around the turn of year. Long-term bond yields have declined, consistent with the subdued outlook for inflation and lower expectations for future policy rates in a number of advanced economies. Also, equity markets have risen, supported by growth in corporate earnings. In Australia, short-term bank funding costs have moderated, although they remain a little higher than a few years ago. The Australian dollar has remained within the narrow range of recent times. While the terms of trade have increased over the past couple of years, they are expected to decline over time.
The Australian labour market remains strong. There has been a significant increase in employment and the unemployment rate is at 5 per cent. A further decline in the unemployment rate to 4¾ per cent is expected over the next couple of years. The vacancy rate is high and there are reports of skills shortages in some areas. The stronger labour market has led to some pick-up in wages growth, which is a welcome development. The improvement in the labour market should see some further lift in wages growth over time, although this is still expected to be a gradual process.
Other indicators suggest growth in the Australian economy slowed over the second half of 2018. The central scenario is still for the Australian economy to grow by around 3 per cent this year. The growth outlook is being supported by rising business investment, higher levels of spending on public infrastructure and increased employment. The main domestic uncertainty continues to be the strength of household consumption in the context of weak growth in household income and falling housing prices in some cities. A pick-up in growth in household income is nonetheless expected to support household spending over the next year.
The adjustment in the Sydney and Melbourne housing markets is continuing, after the earlier large run-up in prices. Conditions remain soft in both markets and rent inflation remains low. Credit conditions for some borrowers have tightened a little further over the past year or so. At the same time, the demand for credit by investors in the housing market has slowed noticeably as the dynamics of the housing market have changed. Growth in credit extended to owner-occupiers has eased further. Mortgage rates remain low and there is strong competition for borrowers of high credit quality.
Inflation remains low and stable. Underlying inflation is expected to pick up over the next couple of years, with the pick-up likely to be gradual and to take a little longer than earlier expected. The central scenario is for underlying inflation to be 2 per cent this year and 2¼ per cent in 2020. Headline inflation is expected to decline in the near term because of lower petrol prices.
The low level of interest rates is continuing to support the Australian economy. Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual. Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.
RBA Lowe: Income growth to provide counterweight to falling house price
RBA Governor Philip Lowe said in a speech that nationwide housing prices have fallen by 9% since peaking in 2017, bringing them back to level in mid-2016. He noted that “declines of this magnitude are unusual, but they are no unprecedented”. Movement in house prices would influence consumer spending, building activity, access to finance by small businesses and profitability of financial institutions.
Though, labor market is expected to continue to tighten with gradual increase in wage growth and faster income growth. That should “provide a counterweight to the effect on spending of lower housing prices.” And overall, Lowe said the adjustment in our housing market is manageable for the overall economy. It is unlikely to derail our economic expansion. It will also have some positive side-effects by making housing more affordable for many people.”
On monetary policy, Lowe also noted that a “strong labour market is the central ingredient in the expected pick-up in inflation”. Wag growth would “boost household income and spending and provide a counterweight to the fall in housing price”. And, “a lot depends upon the labour market”. RBA will “continue to assess the shifts in the global economy, trends in household spending and how the tension between the labour market and output indicators resolves itself. ”
Lowe also reiterated that the probabilities for the next move to go up or down are “reasonably evenly balanced”.
Lowe speech “The Housing Market and the Economy“.