The Reserve Bank of Australia held its monetary policy meeting last week on Tuesday morning. The central bank left interest rates unchanged at 1.50%, as it has done since August 2016. The markets widely anticipated this move.
However, the forward guidance, which was the key aspect of this meeting, saw the central bank leaving its statement unchanged. This was against the general view that the RBA could be staring at an interest rate cut down the line.
The RBA statement gave little hints about dovish forward guidance. This came despite RBA Governor Lowe noting that the Australian economy had slowed since the second half of last year. In fact, he said that the low interest rates were supporting the Australian economy.
“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 monetary policy statement was largely unchanged from the February meeting. Lowe said that progress would be gradual. This is because the central bank expects further progress in unemployment levels. It also expects that inflation will gradually rise back to the 2.0% target rate set by the RBA.
The bank maintained its view that growth would average around 3.0% for 2019. Lowe noted that the growth outlook was lifted by a rise in business investment, as well as higher spending on infrastructure and gradually improving labor market conditions. Lowe affirmed:
“A further decline in the unemployment rate to 4.75% is expected over the next couple of years. The vacancy rate is high and there are reports of skills shortages in some areas,”
The central bank expressed concerns on household spending. The governor stated that the main uncertainty came from weaker household consumption amid falling wages and house prices.
Australia GDP weakens further in Q4 2018
The fourth quarter GDP report showed some disappointing figures. Australia’s economy grew at a pace of 0.2% in the three months ending December 2018. This was weaker than the 0.3% increase in the third quarter.
Economists forecast that GDP would rise 0.5% during the period. On an annualized basis, Australia’s GDP advanced just 2.6%, down from 2.8% previously.
Bruce Hockman, chief economists for ABS, said:
“Growth in the economy was subdued, reflecting soft household spending and a decline in dwelling investment.”
He added that weaker approvals for dwelling constructions indicate further declines in the coming months.
Household spending in Australia rose 0.4%, but it was still rising at a modest pace. Investment in dwellings fell sharply by 3.4% during the quarter. Private investment was also seen coming out weaker than expected.
The data was consistent with the declines in construction activity. Mining investment was down during the fourth quarter. However, oil and gas production increased by 7.7% during the reported period.
The government final consumption expenditure rose 1.8% in areas such as health, aged care, and disability services. Contributions from the healthcare sector remained one of the most significant areas of growth to the overall economic output.
Retail sales rise 0.1% in January 2019
The quarterly retail sales report came out later in the week. Data showed that Australia’s retail sales advanced just 0.1% in January.
Economists polled had forecast that retail sales would rise 0.3% during the period. The decline in retail sales comes after they fell 0.4% in December.
Spending in discretionary categories turned flat after falling 1.1% in December, with annual growth hitting a multi-year low. Data showed that in a longer term, the falling home prices made a dent in retail spending.
Following the release of the retail sales report, economists now speculate that the RBA could be looking at a rate hike sometime later this year. Every central bank meeting from here on out is likely to be a live event for such a decision.