Australian Financial Review
The Reserve Bank of Australia is clinging to its record low interest rate setting even after upgrading its economic and inflation outlook and tipping the jobless rate to fall to a decade-low of 4.75 per cent.
RBA governor Philip Lowe said in a statement on Tuesday that economic growth was forecast to average about 3.5 per cent this year and in 2019, above trends since the 2008 global financial crisis and slightly more than the RBA’s previous estimates of 3.25 per cent.
The central bank’s outlook for the labour market was also more positive and it noted skill shortages were starting to bite in some areas as it hopes for a long-awaited pick-up in wages.
The RBA tipped the jobless rate to fall below 5 per cent in 2020, lower than its most recent best guess of full employment.
“The Australian economy is performing well,” Dr Lowe said.
“Business conditions are positive and non-mining business investment is expected to increase. Higher levels of public infrastructure investment are also supporting the economy, as is growth in resource exports.”
Despite the bullish economic forecasts, the RBA left the official interest rate unchanged for the 27th consecutive month at its monetary policy meeting and gave no indication it would lift rates from a record-low 1.5 per cent any time soon.
The central bank said one ongoing source of uncertainty was household consumption, given income growth was low, debt levels high and house prices in Melbourne and Sydney had fallen recently.
In the face of risks from falling house prices, a US-China trade skirmish and higher global interest rates, the RBA’s more upbeat forecasts were premised on a run of recent strong domestic economic data.
Annual economic growth roared to 3.4 per cent in the June quarter and the jobless rate fell to 5 per cent in September, two years earlier than the RBA had forecast.
The last time the unemployment rate was below 5 per cent was January 2009, before the global financial crisis pushed up unemployment.
Despite weakness in inflation in the September quarter, partly due to an increase in the government’s childcare subsidy, the RBA expects inflation to rise gradually to be a bit higher than its earlier forecast of 2.25 per cent in 2020 as the labour market tightens.
JPMorgan chief economist Sally Auld said interest rate rises still appeared to be far enough away for the RBA not to be too explicit.
“While these revisions are, in part, a mark-to-market exercise given better growth and labour market outcomes of late, they also signal that the RBA now has greater confidence in the economy’s trajectory in coming years,” she said.
“The natural read through would be that this implies that the potential for hikes is now also earlier relative to the bank’s thinking, but the RBA refrained from changing its forward guidance on rates.”
Treasurer Josh Frydenberg met with the RBA board on Tuesday to discuss the economy after its monetary policy meeting.
“Welcome the RBA statement today that ‘the Australian economy is performing well’ as well as the increase to its economic growth forecast to 3.5% and its expectation that unemployment will fall to 4.75% in 2020,” the Treasurer tweeted.
The Australian dollar was little changed after the RBA’s statement, trading at around US72.10¢ on Tuesday afternoon.
While the RBA has held rates anchored since August 2016, the US Federal Reserve has increased the Fed Funds target rate eight times in the past three years to a band of 2 to 2.25 per cent. The US central bank is aiming to contain any inflation from President Donald Trump’s pro-cyclical fiscal stimulus and a 49-year low jobless rate of 3.7 per cent.
Most market economists are not expecting a RBA interest rate increase until mid-2019, with a minority believing 2020 is more plausible if the economy weakens as a result of softer house prices and a potential global slowdown.
The central bank has held interest rates steady since cutting the country’s cash rate by 0.25 of a percentage point in August 2016, a move that heralded the start of a record-breaking run of monetary policy inaction.
The RBA has been waiting for falling unemployment to translate into a sustainable increase in wages to bring inflation firmly back into its 2 to 3 per cent target range.
Headline inflation is running at 1.9 per cent and the bank’s preferred underlying measure was 1.7 per cent in the September quarter.
A key data point for the central bank will be the wage price index to be published on November 14, National Australia Bank economists said.
The bank signalled it was not overly concerned about declining Sydney and Melbourne house prices, saying conditions had “continued to ease” as demand by investors slowed noticeably.
“Credit conditions are tighter than they have been for some time, although mortgage rates remain low and there is strong competition for borrowers of high credit quality,” the RBA said.
The November monthly statement did devote greater attention to global risks, noting international financial conditions had “tightened somewhat”, equity prices had declined and yields on some government bonds had increased.
“One ongoing uncertainty regarding the global outlook stems from the direction of international trade policy in the United States,” the statement said, in a repeat of earlier statements.
Some market economists criticised the RBA for being overly bullish on the economic outlook, amid global risks and declining house prices.
“We are a little surprised that the bank has decided to lift its growth forecast in 2019 to 3½ per cent,” Westpac chief economist Bill Evans said.
“Clearly, the bank is less concerned about the headwinds.”
“We expect that through 2019 the bank will be surprised about the slowdown in the Australian economy and adjust its outlook accordingly.”
The statement on Tuesday was a preview to the RBA’s more detailed Statement on Monetary Policy, due to be published on Friday.
Meanwhile, consumer confidence rose 1.9 per cent, according to the latest weekly reading by the ANZ-Roy Morgan survey, meaning consumer sentiment has regained almost two-thirds of the drop suffered on the weekend of the Wentworth byelection.
Article appeared in The Australian Financial Review on 6 November 2018.
Article written by John Kehoe