• 23/06/2024

Reserve Bank leaves interest rates on hold at 1.5pc, many analysts don’t expect a rise until 2020

Michael Janda| ABC Online| 4 December 2018


The Reserve Bank has left official interest rates on hold at a record low 1.5 per cent for the 26th consecutive RBA board meeting.

Key points:

  • Interest rates have been on hold for 28 months, during which the RBA board has met 26 times
  • The RBA governor says the economy is improving, but the improvement will be “gradual”
  • Almost 50 per cent of economists expect the cash rate to remain at a record low 1.5 per cent for at least another year

The last move in the cash rate was a 25-basis-point cut in August 2016, but despite falling unemployment and strong economic growth since then, the RBA has not felt compelled to increase interest rates.

The latest official ABS inflation figures put consumer price rises at just 1.9 per cent over the past year — just below the bottom of the RBA’s 2-3 per cent target range — with the bank’s preferred measure even lower at 1.75 per cent.

In his post-meeting statement, RBA governor Philip Lowe said there continued to be positive signs that the economy is picking up, including wages and inflation, but that the process looks like it will be “gradual”.

“The Australian economy is performing well,” he wrote.

“The central scenario is for GDP growth to average around 3.5 per cent over this year and next, before slowing in 2020 due to slower growth in exports of resources.

Dr Lowe added that the fall in unemployment — now at a six-year low of 5 per cent — is likely to continue and should see workers getting slightly bigger pay increases in the future.

“The stronger labour market has led to some pick-up in wages growth, which is a welcome development,” he wrote.

“The improvement in the economy should see some further lift in wages growth over time, although this is still expected to be a gradual process.”

Wages crisis threatens stability

Wages crisis threatens stability

Some of Australia’s leading labour market analysts warn wages stagnation is undermining financial stability and social cohesion and there is no improvement in sight.

But the RBA governor also pointed to risks in the outlook.

“One continuing source of uncertainty is the outlook for household consumption. Growth in household income remains low, debt levels are high and some asset prices have declined,” Dr Lowe cautioned.

“The drought has led to difficult conditions in parts of the farm sector.”

Another key concern for Dr Lowe is the simmering trade war between the US and China, even though a short-term truce was announced over the weekend.

“The global economic expansion is continuing and unemployment rates in most advanced economies are low,” he observed.

“There are, however, some signs of a slowdown in global trade, partly stemming from ongoing trade tensions.”

‘Rates won’t rise for another two years’

Dr Lowe concluded that the low level of interest rates is continuing to support the Australian economy and that “the board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy”.

Most analysts are expecting that steady interest rates would continue being the bank’s best course of action for many months to come.

While more than three-quarters of economists surveyed by Finder expected the next move in rates to be up, only 10 expected it to come in the first half of next year, while around half do not expect a rate rise until 2020 or beyond.

Some, such as Marcel Theliant from Capital Economics, do not expect the next increase in interest rates until late in 2020.

“The RBA’s increased cautiousness supports our view that interest rates won’t rise for another two years,” he wrote in a note.

“Our view is that GDP growth in China will slow further over the coming months despite policy loosening.

“What’s more, we think that the downturn in the housing market will eventually restrain consumption growth as income growth is set to remain sluggish.”

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