The Reserve Bank of Australia left its cashrate unchanged at 1.00% yesterday.
Bank governor Philip Lowe said the bank would ease monetary policy further if needed – a policy which, he didn’t mention, along with the escalation of debt has distorted economies around the world.
Dr Lowe also said interest rates might have to stay low for “an extended period” to reduce unemployment and achieve “more assured progress” towards the bank’s inflation target.
This is how he saw the economy:
“The outlook for the global economy remains reasonable. However, the increased uncertainty generated by the trade & technology disputes is affecting investment and means that the risks to the global economy remain tilted to the downside. In most advanced economies, unemployment rates are low and wages growth has picked up, although inflation remains low. The slowdown in global trade has contributed to slower growth in Asia. In China, the authorities have taken steps to support the economy, while continuing to address risks in the financial system.
“Global financial conditions remain accommodative. The persistent downside risks to the global economy combined with subdued inflation have led a number of central banks to reduce interest rates this year and further monetary easing is widely expected. Long-term government bond yields have declined further and are at record lows in many countries, including Australia. Borrowing rates for both businesses & households are also at historically low levels. The $A is at its lowest level of recent times.
“Economic growth in Australia over the first half of this year has been lower than earlier expected, with household consumption weighed down by a protracted period of low income growth & declining housing prices. Looking forward, growth in Australia is expected to strengthen gradually from here. The central scenario is for the Australian economy to grow by around 2½% over 2019 and 2¾% over 2020. The outlook is being supported by the low level of interest rates, recent tax cuts, ongoing spending on infrastructure, signs of stabilisation in some housing markets & a brighter outlook for the resources sector. The main domestic uncertainty continues to be the outlook for consumption, although a pickup in growth in household disposable income & a stabilisation of the housing market are expected to support spending.
Employment has grown strongly over recent years and labour force participation is at a record high. There has, however, been little inroad into the spare capacity in the labour market recently, with the unemployment rate having risen slightly to 5.2%. The unemployment rate is expected to decline over the next couple of years to around 5%. Wages growth remains subdued and there is little upward pressure at present, with strong labour demand being met by more supply. Caps on wages growth are also affecting public sector pay outcomes across the country. A further gradual lift in wages growth would be a welcome development. Taken together, recent labour market outcomes suggest that the Australian economy can sustain lower rates of unemployment & underemployment.
“The recent inflation data were broadly as expected and confirmed that inflation pressures remain subdued across much of the economy. Over the year to the June quarter, inflation was 1.6% in both headline & underlying terms. The central scenario remains for inflation to increase gradually, but it is likely to take longer than earlier expected for inflation to return to 2%. In both headline & underlying terms, inflation is expected to be a little under 2% over 2020 and a little above 2% over 2021.
“Conditions in most housing markets remain soft, although there are some signs of a turnaround, especially in Sydney & Melbourne. Growth in housing credit remains low. Demand for credit by investors continues to be 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.
“It is reasonable to expect that an extended period of low interest rates will be required in Australia to make progress in reducing unemployment and achieve more assured progress towards the inflation target. The board will continue to monitor developments in the labour market closely and ease monetary policy further if needed to support sustainable growth in the economy & the achievement of the inflation target over time.”
Attribution: Bank release.