RBA left the cash rate unchanged at 1.5% for the 22nd meeting today. The accompanying statement continued to deliver a “neutral” tone on the future path of the monetary policy. Since the last meeting, domestic economic growth has stayed, and will stay, “above trend” while the job market has continued to improve. Wage growth has remained soft but the worst is likely over. Hopefully, this would help lift household consumption which has been RBA’s major concern. The statement had more coverage of inflation that the previous one. The discussion signals that RBA might downgrade its inflation forecast at the upcoming Statement of Monetary Policy.
RBA maintained the estimate that Australia’s GDP growth would “average a bit above +3% in 2018 and 2019, adding that this “should see some further reduction in spare capacity”. Meanwhile, it indicated that higher levels of public infrastructure investment are supporting the economy, as well as “growth in resource exports”. The central bank reiterated that the outlook of household consumption has remained uncertain as “household income has been growing slowly and debt levels are high”. It added at this meeting that “the drought has led to difficult conditions in parts of the farm sector”. Policymakers remained “positive” over the job market, suggesting that “further gradual decline in the unemployment rate is expected over the next couple of years to around 5%. They acknowledged that wage growth remained low but maintained the view that the rate has bottomed and growth would be lifted by the improvement in the economy.
The central bank covered a bit more about inflation at the meeting. As noted in the statement, inflation has been “in line” with RBA’s expectations with headline CPI and core CPI at +2.1% and close to +2%, respectively, in the past year. It suggested that the central forecast is “for inflation to be higher in 2019 and 2020 than it is currently”. Meanwhile, it noted that “once-off declines in some administered prices in the September quarter are expected to result in headline inflation in 2018 being a little lower than earlier expected, at +1.75%”. This signals that we might see downward revision in inflation forecast at the Statement of Monetary Policy due Friday. Back in May, RBA forecast that headline inflation would run between 2-2.25% for the remainder of 2018.
RBA affirmed that financial conditions have remained “expansionary”. It acknowledged that while money-market interest rates at home climbed higher from the start of the year, they have “declined somewhat since the end of June”. The members indicated that the higher rates have “not fed through into higher interest rates on retail deposits”. Although some banks have raised mortgage rates slightly, the average mortgage rate has actually reduced from a year ago. Nonetheless, RBA acknowledged that housing prices in Sydney and Melbourne have “continued to ease” while “nationwide measures of rent inflation remain low”, as a result of tighter lending standards and slower demand from investors.
Globally, the members acknowledged that Chinese economic growth has “slowed a little, with the authorities easing policy while continuing to pay close attention to the risks in the financial sector”. Otherwise, they maintained the view that global economy has continued to expand despite uncertainty coming from US trade policy.