Record Low 1.5% Cash Rate Remains

April 03, 2018

The Reserve Bank of Australia doing us all a favour?

THE Reserve Bank of Australia has kept the official cash rate on hold for its third meeting of the year, marking 20 months in a row at its record low of 1.5 per cent.

The RBA last cut the cash rate in August 2016, following an earlier cut to 1.75 per cent in May. There has not been an official cash rate increase since November 2010.

Thanks to the sluggish rate of wages growth as well as the cooling housing market, most experts believe rates won’t rise until some time next year.

While the Australian job market is improving, an increase in the participation rate has kept the unemployment steady at close to 5.6 per cent.

In a statement issued following the RBA’s decision, governor Philip Lowe said the interest rate was kept on hold as the global economy had strengthened over the past year.

“A number of advanced economies are growing at an above-trend rate and unemployment rates are low,” Mr Lowe said.

“The Chinese economy continues to grow solidly, with the authorities paying increased attention to the risks in the financial sector and the sustainability of growth.

“Globally, inflation remains low, although it has increased in some economies and further increases are expected given the tight labour markets. As conditions have improved in the global economy, a number of central banks have withdrawn some monetary stimulus and further steps in this direction are expected.”

Mr Lowe said the prices of a number of Australia’s commodity exports had fallen recently, but remained within the ranges seen over the past year or so.

He said Australia’s terms of trade were expected to decline over the next few years, although they remain at a relatively high level.

CoreLogic head of research Tim Lawless said housing market conditions were likely to be moving further down the RBA’s list of priorities, considering the market was showing every sign of moving through a soft landing, with the pace of value decline easing over recent months.

“The controlled slowdown in the housing sector is likely to be a welcome outcome from the RBA, who are more likely to be focusing on labour markets, where the rate of unemployment, although lower than a year ago, crept higher, from 5.4 per cent to 5.5 per cent in February,” he said.

“With some slack in labour markets, wages growth remains close to record lows, which is keeping a lid on inflation and household consumption. National dwelling values were flat last month, however six of the eight capital cities saw dwelling values slip lower in March, albeit at a reduced rate of decline relative to other months.

“Despite the hold decision from the RBA, mortgage rates remain close to historic lows, particularly for owner occupiers who are paying down both their interest and principal.”

The US Federal Reserve raised interest rates by 0.25 per cent last month, and signalled more increases could be expected on the back of recent improvements in economic growth and unemployment numbers.

But in a report released last week, Commonwealth Bank senior economic analyst Belinda Allen said she didn’t expect to see a similar move in Australia any time soon.

“Wages data shows still feeble growth, especially in the private sector where the large bulk of workers earn their living,” Ms Allen said.

AAP has reported HSBC Australia chief economist Paul Bloxham as saying the RBA would not move rates until it was clear wages were growing fast enough to begin pushing up inflation.

“The RBA has, so far, proven to be very patient as it waits for signs that wage growth is set to pick up,” Mr Bloxham said in a research note.

“However, our view remains that the labour market will tighten further, that wage growth will lift and that underlying inflation will return to the lower edge of the RBA’s two to three per cent target band through 2018.”

HSBC predicts rates will rise in the fourth quarter of 2017/18.

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