Australian Financial Review
The Reserve Bank of Australia extended its record-breaking run of inaction on rates, keeping the official cash rate on hold for a 28th consecutive month.
Following its December meeting on Tuesday, the RBA kept the official cash rate at 1.5 per cent but was slightly more positive on the labour market citing a pick-up in wages growth last month.
“The outlook for the labour market remains positive. The unemployment rate is 5 per cent, the lowest in six years,” said RBA Governor Philip Lowe in his statement.
“With the economy expected to continue to grow above trend, a further reduction in the unemployment rate is likely. The stronger labour market has led to some pick-up in wages growth, which is a welcome development.”
The central bank said in November it wanted to see more evidence of higher wages before it considered hiking rates.
Wage growth in the September quarter accelerated 0.6 per cent, taking the annual rate to 2.3 per cent; the unemployment rate held at 5 per cent.
JP Morgan chief economist Sally Auld said wage growth remained the most important factor for the RBA as it pondered future rate hikes.
“I think broad based wages growth is the key, which will require the unemployment rate to [go to] 4.5 per cent and hence for the economy to run above trend for the next year,” she said. “The risk to this is consumption. If it slows, then we won’t have above trend growth and a declining unemployment rate. So no rate hikes in 2019 if that plays out.”
The housing market has emerged as another key risk, with the Reserve Bank turning more dovish on credit conditions and removing the word “robust” from its statement with reference to growth in credit extended to owner-occupiers.
“Credit conditions for some borrowers are tighter than they have been for some time, with some lenders having a reduced appetite to lend,” Dr Lowe said.
“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 to an annualised pace of 5 – 6 per cent.”
Wednesday’s GDP report is expected to show economic growth is still tracking above-trend.
The September quarter current account deficit, released on Tuesday, was slightly less positive than the market was counting on, narrowing to $10.7 billion from $12.1 billion. The result will add 0.4 percentage points to Wednesday’s GDP print, above the 0.3 points the market was expecting from the net exports component.
Economists expect the central bank to keep the cash rate on hold at 1.5 per cent until at least the fourth quarter of 2019, according to Bloomberg’s survey.
Article appeared in The Australian Financial Review on 4 December 2018.
Article written by William McInnes.