The RBA has kept rates steady at their historical low of 1.5 per cent, as widely expected, while offering little to encourage talk the central bank will hike in 2018.
Reserve Bank governor Philip Lowe continued to strike an upbeat tone on the state of the local economy, but warned that wage growth and inflation are likely to stay “low” for “a while yet”.
“Over recent months there have been more consistent signs that non-mining business investment is picking up,” Mr Lowe said in the statement accompanying Tuesday’s decision. “A consolidation of this trend would be a welcome development.”
Mr Lowe also pointed to “a large pipeline of infrastructure investment” which is “also supporting the outlook”.
“Against this, slow growth in real wages and high levels of household debt are likely to constrain growth in household spending,” he said, despite the fact that “employment has continued to grow strongly over recent months” and that “various forward-looking indicators point to solid growth in employment over the period ahead”.
“Wage growth remains low,” Mr Lowe said. “This is likely to continue for a while yet, although the stronger conditions in the labour market should see some lift in wage growth over time. Inflation also remains low and is expected to pick up gradually as the economy strengthens.”
The RBA’s “growing confidence in the outlook for activity and inflation may mean it will be prepared to signal early next year that it’s getting close to raising interest rates,” Capital Economics chief Australia economist Paul Dales said. That said, Mr Dales said he still believes that subdued economic growth and inflation will force the RBA to keep rates on hold for all of next year.
“But the risks lie on the upside,” he said.
“Today’s RBA statement continues the upbeat tone of the commentary in recent speeches,” CBA economist Michael Workman said. “The domestic economic tide is rising.”
The Australian dollar, which dipped earlier in the day following the release of building approvals data, fell another fifth of a US cent following the announcement to dip below US78¢. Governor Lowe echoed comments from the prior month’s statement, noting that the local currency “has appreciated since mid year” and that the higher exchange rate is “weighing on the outlook for output and employment”.
On housing, Mr Lowe again noted “supervisory measures” implemented by The Australian Prudential Regulation Authority to help cool hot residential property markets. He noted that “in Sydney…there have been further signs that conditions are easing”.
The RBA “remains firmly on hold” and is “trying to present two simultaneous messages,” JP Morgan rates strategist Sally Auld.
“In an effort to contain the real economy impact of a rising currency, officials are trying to communicate that the outlook for RBA policy should not be viewed through the same lens as other developed market central banks.
“But on the other hand, the RBA’s commentary on the domestic economy remains very much of the ‘glass half full’ variety, in order to keep the home fires burning. It remains to be seen whether markets can discern these subtleties.”
Traders are pricing in a one-in-four chance of a rate rise by the February meeting next year, with low odds of a move before then. By the end of the 2018, markets are pricing in the RBA to have hiked twice. A run of solid economic data in Australia and a global turn away from the extremes of stimulative monetary policy have also convinced some economists to predict local rates will reach 2 per cent next year.
But not all are convinced, pointing to the difficulty in raising borrowing costs at a time of historically high levels of household debt.
RBA governor Philip Lowe is “standing [his] ground against the hawkish tunes of other central banks around the world,” Aberdeen Standard Investments head of Australian macro David Choi said. Mr Choi said household consumption is “the key” consideration for monetary policymakers.
“The RBA wants to strike a balance between the low rates required to support lacklustre household consumption and guarding the economy from the medium-term risk of unsustainable growth in household debt,” Mr Choi said. “Until we see a sustainable pick up in consumption, higher cash rates remain a long way off.”
Rates last moved in August 2016 when then-governor Glenn Stevens cut the central bank’s official rates target by a quarter of a percentage point. This is the 14th consecutive month with no change to the target.