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RBA rates on hold in first meeting of 2019 – 5 February 2019

Australian Financial Review


The Reserve Bank of Australia has held the official interest rate steady at 1.5 per cent, acknowledging risks have increased and downgrading its outlook for the economy which is softening according to new data published Tuesday.

Following its first monetary policy meeting of 2019, RBA governor Philip Lowe said in a statement ​the central scenario is for the domestic economy to grow about 3 per cent this year and a little less in 2020, down from the 3.5 per cent it forecast in December.

Adding to its slightly less upbeat tone, the RBA said underlying inflation would take a “little longer than expected” to rise to the its 2-3 per cent target band and updating its underlying inflation forecast to 2 per cent for 2019 and 2.25 per cent in 2020.

The Australian dollar edged up about half a cent to 72.46¢, possibly reflecting the RBA did not officially indicate any plan to back away from its hopes to eventually raise interest rates, after some economists predicted it would be forced to move to a neutral position due to a softening economy.

The central bank is pinning its hopes on the “strong” labour market, improving its jobless rate forecast to 4.75 per cent over the next couple of years, down from the current 5 per cent rate it previously tipped as a bottom.

The central bank’s decision comes in the wake of worrying signs the domestic economy has been deteriorating over summer as the global economy slows.

Weak retail turnover, falling new car sales, contracting services activity, slumping trade imports and tanking building approvals revealed in the past two days for December or January paint a soft economy entering 2019.

The RBA admitted some downside risks in Australia and globally had increased and that a weaker-than-expected consumer had dented September quarter growth since its previous economic growth forecasts.

“Growth in household income has been low over recent years, but is expected to pick up and support household spending. The main domestic uncertainty remains around the outlook for household spending and the effect of falling housing prices in some cities,” RBA said.

Challenging environment

The bank scotched an earlier reference that the domestic economy is “performing well”.

The bank added a more cautious tone on the “weakened” conditions in the Sydney and Melbourne housing markets, and reiterated that credit conditions for some borrowers were tighter.

The housing markets in Sydney and Melbourne are going through a period of adjustment, after an earlier large run-up in prices. Conditions have weakened further in both markets and rent inflation remains low. Credit conditions for some borrowers are tighter than they have been.

Retailers’ dismal Christmas trading period was laid bare by official figures on Tuesday showing retail sales fell 0.4 per cent in December. Spending on discretionary items such as clothing, footwear and household goods fell more heavily.

Asked about the weak retail sales, Prime Minister Scott Morrison said it was a “difficult period coming into the back end of the year” and was a “reminder of the tough headwinds we’re facing”.

The poor result, backing up anecdotal evidence of retailers experiencing weak summer holiday trading,

Though the retail figures are seasonally adjusted, economists said they were partly lowered by consumers bringing forward purchases to take advantage of heavy discounting and Black Friday sales in November, when retail sales jumped 0.5 per cent.

Commonwealth Bank of Australia economist Gareth Aird said the recent data flow relating to the consumer was concerning.

“Spending has slowed significantly and the latest read on consumer confidence suggests that concerns around the economic outlook for households have risen,” he noted.

Ernst & Young chief economist Jo Masters said, “Retail sales data adds to the run of softer data in Australia of late.”

“[Retail volumes] account for one third of private consumption, which itself accounts for just under 60 per cent of the economy. This sets up a soft base for further quarter GDP data.”

New vehicle sales fell a hefty 7.4 per cent to 81,994 in January, compared to the same month last year, with the car industry blaming the pull back on lower consumer confidence.

“The current economic environment is a challenging one, with an imminent federal election, a declining real estate market and tighter lending practices,” said Federal Chamber of Automotive Industries chief executive Tony Weber.

Services slow

Separately, the services sector suffered its worst activity monthly reading since October 2014, falling 7.8 points to 44.3 points in January, according to the Australian Industry Group (AiG) Performance of Services Index. Sharp drops in retail and wholesale trade dragged down overall services activity to post its first contraction since February 2017.

“The services sector slumped sharply in January following a period of slowing activity over the second half of last year,” Ai group chief executive Innes Willox said.

“Sales fell away in January and new orders were also down despite widespread price discounting.”

“The retail sub-sector recorded its weakest monthly result for over six years.”

The international trade balance offered a mixed picture, with the trade surplus surging to $3.7 billion in December, up $1.4 billion on November.

However, in another sign consumers and business pulled back on spending, imports of total goods and services fell 6 per cent. Business imports of capital goods plunged 15 per cent.

The sharp fall in import values more than offset a small decline in export values.

“The details of the report were unequivocally weak, particularly imports which sank 6 per cent month-on-month,” JPMorgan economist Tom Kennedy said.

More positively, the $22.2 billion trade surplus for 2018 was the highest calendar year surplus ever and the firs time since 1972 where every month was in surplus, Trade Minister Simon Birmingham said.

Signs of a softening economy were evident on Monday when data showed building approvals slumped 8.4 per cent in December, taking the slide down in new residential approvals by 22.5 per cent for 2018.

One consistent bright spot for the economy has been strong employment growth and a low jobless rate of 5 per cent.

However, ANZ job ads on Monday recorded their first annual fall in almost four years, falling 3.7 per cent below the January 2018 level.

More positively, weekly consumer confidence measured by ANZ-Roy Morgan rose to a two-month high of 118.1 points, above the long-term average of 113.1, CommSec noted.

“Aussie economic data releases have been decidedly mixed over the past two months,” CommSec senior economist Ryan Felsman said.

Article appeared in The Australian Financial Review on 5 February 2019.

Article written by John Kehoe.


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