RBA increasingly confident on economic growth, but still wary on household income and debt



Updated

November 09, 2018 13:29:45

Official interest rates look set to remain on hold as the Reserve Bank waits for the jobless rate to ebb further and inflation to move higher.

Key points:

  • RBA now sees unemployment rate below 5pc in 2020 and has edged up GDP forecast
  • Household debt and low wage growth remain key concerns
  • Official interest rate likely to be on hold through next year

In its quarterly statement on monetary policy released this morning, the central bank signalled it would cling to the record-low cash rate setting of 1.5 per cent despite saying the economy was “performing well”.

“If that progress is made, higher interest rates are likely to be appropriate at some point,” the statement said.

“However, given the expected gradual nature of that progress, the board does not see a strong case to adjust the cash rate in the near term.”

Earlier this week, the RBA Board left rates steady for the 27th consecutive month and gave no sign of when a rate hike might occur despite forecasts from market economists that rates might not move until late 2019.

In a bullish statement, the RBA said economic growth would peak “a little stronger than earlier expected” at 3.5 per cent by December 2018, slightly more than previous forecasts of 3.25 per cent.

Unemployment is forecast to fall to 4.75 per cent by June 2020 and inflation will rise to 2.25 per cent in 2019 to be within the central bank’s 2 to 3 per cent target band.

The RBA believes the Australian dollar, now currently around 72.8 US cents, would continue to remain “in the fairly narrow range it has been in for some time”.

However, the RBA is also cautiously monitoring slow growth in household incomes, an environment of high household debt and the impact of falling house prices as it considers the next rates move.

SoMP Forecasts Jun 2019 Dec 2018 Jun 2019 Dec 2019 Jun 2020 Dec 2020
GDP (per cent) 3.4 (3) 3.5 (3.25) 3.25 3.25 3.25 (3) 3
Unemployment rate (per cent) 5.4 (5.5) 5 (5.5) 5 (5.25) 5 (5.25) 4.75 (5.25) 4.75 (5.25)
CPI inflation (per cent) 2.1 2 (1.75) 2 2.25 2.25 2.25
Underlying inflation (per cent) 1.75 (2) 1.75 2 2.25 (2) 2.25 2.25

Source: RBA SoMP Note: Figures in brackets were previous forecasts changed this quarter

Household income RBA’s main worry

The RBA says demand in the established housing markets of Sydney and Melbourne has “clearly slowed”, with house prices continuing to “decline steadily”.

“The outlook for household income remains a key uncertainty especially in the context of high household debt and a slowing housing market,” the RBA says.

“Leading indicators of housing demand have slowed, implying that dwelling investment could fall more sharply beyond that.”

But on a positive note, the RBA believes the improving conditions could result in a gradual lift in wages growth “over time”.

The RBA expects “a modest increase” in private sector wages in line with a tightening labour market, with more firms reporting increases of above 3 per cent.

However, the RBA’s liaison suggests firms are using other strategies to keep employees happy, including performance bonuses, flexible work arrangements and additional annual leave.

Economists will be watching the next Wage Price Index to be published by the Australian Bureau of Statistics next week. The index currently remains stuck at 2.1 per cent growth.

The RBA remains cautious about continuing trade tensions between the US and China despite comments from US President Donald Trump that a breakthrough in the soured relationship was imminent.

“The possibility of trade protectionism escalating further presents a significant downside to global growth especially if trade tensions spread to to involve other economies,” it said.

In a swipe at commercial banks which raised interest rates independently recently, the RBA said the overall effect of higher funding costs on bank profits was “fairly small”.

While the Reserve Bank has held rates steady since August 2016, the US Federal Reserve has raised the fed’s funds rate target eight times in three years after rising inflation and a recovery in the US economy.

Few global concerns

JP Morgan economist Sally Auld said while the changes in forecast were well telegraphed, they signalled that the RBA now has greater confidence in the economy’s trajectory in coming years and that the RBA is making faster progress towards its goals.

“The forecast revisions seemingly imply little concern about downside risks to global growth, nor too much anxiety around the potential for negative wealth effects as the domestic housing correction continues,” she said.

“For now, the RBA is comfortable to let the numbers do the talking and has left the forward guidance on rates unchanged.

“This tells us that even with better growth and labour market data to hand, officials feel that rate hikes are still far enough away not to demand more explicit guidance.”

Follow Peter Ryan on Twitter @peter_f_ryan

Topics:

business-economics-and-finance,

money-and-monetary-policy,

unemployment,

australia

First posted

November 09, 2018 12:06:31



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