Summary:
- RBA leaves interest rates unchanged at 1.50%
- Central bank expects wage pressures to build over time
- Unemployment rate expected to fall further leading to higher wage growth
- RBA expects GDP to grow at a faster pace in 2018
- Fourth quarter GDP showed a 0.4% increase, slower than expected
- Annual GDP growth rate in 2017 was at 2.4%
The Reserve Bank of Australia was seen leaving interest rates unchanged at the monetary policy meeting in March as the central bank left interest rates unchanged at 1.50% for the seventeenth consecutive month.
Based on the forward guidance, the central bank said that interest rates will likely remain unchanged at the current levels for the considerable future.
The central bank, in its monetary policy statement, noted that, “Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.”
The central bank was also optimistic about the labor market as it noted that further progress in the reduction in the unemployment and having inflation to return to its target was expected and central bank officials noted that this would be at a gradual pace.
The central bank also acknowledged that the currency monetary policy being pursued was having the desired effects as the low interest rates were supportive of the Australian economy.
The central bank expressed concerns on the pace of wage pressures. In a recent report, the quarter ending December showed that wage price index showed little upside pressure. However, the central bank said that the wage growth deceleration was over.
“The rate of wage growth appears to have troughed and there are reports that some employers are finding it more difficult to hire workers with the necessary skills,” the central bank’s statement said about wage pressures. It expects any meaningful increase in wages to take some time to build.
The cautious optimism over wage growth was justified by the central bank as it said that various forward looking indicates pointed to solid growth in the labor market and the Australian unemployment rate was expected to fall further.
With the Australian labor market expected to tighten in the coming months and with spare capacity diminishing, the central bank was optimistic that this would lead to higher wages over time.
Australia’s unemployment rate was seen around the 5% region but is expected to fall below this level in order for wage pressures to build. Many economists believe that this is a far way off and could mean that the RBA could maintain interest rates at the current levels for a longer period of time.
On inflation, the central bank said that it expects consumer prices to rise as the economy strengthens. The central bank forecast that inflation is expected to rise above 2% by end of this year.
Previously, the RBA Governor Lowe had suggested that annual wage growth needs to rise to around 3.5% in order to keep consumer prices within the 2% – 3% target set by the RBA. Most recent indicators of wage pressures showed that annual wage growth edged higher to 2.8%.
Besides the assessment on the labor market and the economy, the RBA’s monetary policy meeting did not offer any other clues.
The central bank noted that it expects GDP to grow at a faster pace in 2018 compared to the year before. However, the latest quarterly GDP reports released a day after the RBA’s meeting showed that the Australian economy grew at a pace of 0.4% in the quarter ending December 2017.
This was slower than the expectations of a 0.5% increase and the GDP growth in the fourth quarter was slower than the previous quarter’s 0.7% increase, which was revised higher from 0.6%. On an annual basis, the Australian GDP was seen rising just 2.4% in 2017.
