RBA holds cash rate unchanged for the 18th consecutive month

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The Reserve Bank of Australia held its monetary policy meeting last week. As widely expected, the central bank did not surprise as it left interest rates unchanged at 1.50% for 18 months in a row.

The RBA said in its monetary policy statement that based on the available information, the board judged that keeping monetary policy unchanged at its meeting would be consistent in supporting sustainable growth and in achieving the inflation target.

Based on the monetary policy statement, the central bank did not signal any changes to interest rates in the near term. Dr. Philip Lowe, the governor of the RBA said that the central bank’s forecast for faster economic growth remained intact.

The outcome of the RBA’s meeting saw many economists speculating that the tightening cycle by the RBA is not expected at least until the first half of next year. Furthermore, the emerging tightening in the bank’s lending standards especially concerning the home borrower income and expenses alongside higher mortgage rates is expected to potentially delay the rate hike from the RBA.

In his statement, the RBA Governor said that “The low level of interest rates is continuing to support the Australian economy. Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual.”

The central bank said that consumer prices remained low with both measures of inflation and underlying inflation running below the RBA’s inflation target band of 2% – 3%. Consumer prices in Australia are forecast to remain low for sometime according to the RBA. This reflected in lower costs of labor and higher competition in the retail sector.

The central bank said that it expects consumer prices to rise as the economy gradually strengthens and forecasts that inflation could be above 2% in 2018.

On household consumption, the central bank noted that outlook remained uncertain despite growth in household consumption rising steadily since late 2017. Household income was also seen to be growing steadily with debt still at high levels.

The central bank made a few changes in its assessments on the current conditions in the financial markets. It also revised the risks posed by the possible trade wars between the United States and China and said that this was already reflected in the price of the equity markets.

“Equity market volatility has increased from the very low levels of last year, partly because of concerns about the direction of international trade policy in the United States,” the RBA said.

The central bank added the short term borrowing costs for the U.S. dollar also increased and this would spill into funding in other markets that included Australia. The RBA said that with the amount of tighter monetary policy on the short term lending rates would continue to increase and not just because of higher Fed funds rate.

The central bank added that the higher borrowing costs for the U.S. dollar was also felt in the Australian economy as bank borrowings start to grow more expensive.

Economists note that if the Federal Reserve continues to hike rates this could potentially reduce the odds of a rate hike from the central bank next year, especially if the higher borrowing costs would be passed on to the consumers and businesses. Higher rates for housing and higher financing for the business sector could keep the RBA on the sidelines longer than expected.

In a separate report, data from ANZ showed that the job ads survey for March came in flat. According to the report, the survey showed that 177,084 jobs were advertised in March which came to about 11.5% increase compared to the year before. Job ads were seen rising just 0.8% on a monthly basis easing from 0.9% increase since the previous month.


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