Australia’s Reserve Bank left its cashrate unchanged at 0.75% today.
Bank governor Philip Lowe saw weak movement in a number of economic factors, but said employment was growing strongly, albeit the unemployment rate wasn’t falling.
This part of his statement sounded more like a hope than a soundly based expectation: “The central scenario is for the Australian economy to grow by around 2¼% this year and then for growth gradually to pick up to around 3% in 2021. The low level of interest rates, recent tax cuts, ongoing spending on infrastructure, the upswing in housing prices in some markets and a brighter outlook for the resources sector should all support growth.”
And this is how he reached that conclusion:
“While the outlook for the global economy remains reasonable, the risks are tilted to the downside. The US–China trade & technology disputes continue to affect international trade flows & investment as businesses scale back spending plans because of the uncertainty. At the same time, in most advanced economies, unemployment rates are low and wages growth has picked up, although inflation remains low. In China, the authorities have taken steps to support the economy while continuing to address risks in the financial system.
“Interest rates are very low around the world and a number of central banks have eased monetary policy in response to the persistent downside risks & subdued inflation. Expectations of further monetary easing have generally been scaled back over the past month and financial market sentiment has improved a little. Even so, long-term government bond yields are around record lows in many countries, including Australia. Borrowing rates for both businesses & households are also at historically low levels. The $A is at the lower end of its range over recent times.
“The outlook for the Australian economy is little changed from 3 months ago. After a soft patch in the second half of last year, a gentle turning point appears to have been reached. The central scenario is for the Australian economy to grow by around 2¼% this year and then for growth gradually to pick up to around 3% in 2021. The low level of interest rates, recent tax cuts, ongoing spending on infrastructure, the upswing in housing prices in some markets and a brighter outlook for the resources sector should all support growth. The main domestic uncertainty continues to be the outlook for consumption, with the sustained period of only modest increases in household disposable income continuing to weigh on consumer spending. Other sources of uncertainty include the effects of the drought and the evolution of the housing construction cycle.
“Employment has continued to grow strongly and has been matched by strong growth in labour supply, with labour force participation at a record high. The unemployment rate has remained steady at around 5¼%t over recent months. It is expected to remain around this level for some time, before gradually declining to a little below 5% in 2021. Wages growth remains subdued and is expected to remain at around its current rate for some time yet. A further gradual lift in wages growth would be a welcome development and is needed for inflation to be sustainably within the 2–3% target range. Taken together, recent outcomes suggest that the Australian economy can sustain lower rates of unemployment & underemployment.
“The recent inflation data were broadly as expected, with headline inflation at 1.7% over the year to the September quarter. The central scenario remains for inflation to pick up, but to do so only gradually. In both headline & underlying terms, inflation is expected to be close to 2% in 2020 & 2021.
“There are further signs of a turnaround in established housing markets, especially in Sydney & Melbourne. In contrast, new dwelling activity is still declining and growth in housing credit remains low. Demand for credit by investors is subdued and credit conditions, especially for small & medium-sized businesses, remain tight. Mortgage rates are at record lows and there is strong competition for borrowers of high credit quality.
“The easing of monetary policy since June is supporting employment & income growth in Australia & a return of inflation to the medium-term target range. Given global developments & the evidence of the spare capacity in the Australian economy, it is reasonable to expect that an extended period of low interest rates will be required in Australia to reach full employment and achieve the inflation target. The board will continue to monitor developments, including in the labour market, and is prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment & the achievement of the inflation target over time.”
Attribution: Reserve Bank of Australia.