07 Aug RBA UPDATE
At this month’s meeting, the Reserve Bank of Australia (RBA) held the cash rate at the record low of 1.50%.
This marks the twenty fourth month in a row that the RBA has held rates steady, with the last rate movement taking place in August 2016 with a 25 basis point rate cut.
Economists correctly predicted today’s decision, with all 22 economists surveyed by Bloomberg forecasting that the cash rate would remain on hold in August.
RBA remains optimistic about economy
In his monetary policy statement accompanying today’s decision, RBA Governor Philip Lowe remained optimistic about the economy, saying that the low level of interest rates continues to support the economy.
The RBA forecasts the domestic economy will grow at an annual rate of around 3%.
One concern identified as a source of uncertainty for the economy is the outlook for consumption.
“Retail sales have picked up recently, but slow growth in real wages and high levels of household debt are likely to constrain growth in spending,” said Mr Lowe.
The RBA pointed to rising household debt as a key concern, which is basically outpacing overall growth in the economy.
RBA highlights low inflation and rising AUD
The Governor addressed recent inflation data and the surging Aussie dollar (currently around 80US cents).
The annual inflation rate fell to 1.9% in the most recent Consumer Price Index (CPI) – data which Mr Lowe says the RBA expected.
While inflation is currently weak, the Board expects it to pick up gradually as the economy strengthens.
“Higher prices for electricity and tobacco are expected to boost CPI inflation,” said Mr Lowe.
“A factor working in the other direction is increased competition from new entrants in the retail industry.”
Moving to a discussion of the Aussie dollar, the Governor noted the recent appreciation and how it partly reflected a lower US dollar.
He also mentioned how it has affected Australia’s economy and inflation.
The RBA expects the higher exchange rate will contribute to “subdued price pressures” in the economy, and weigh on the outlook for employment and output.
“An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast,” said Mr Lowe.
Will there be a rate movement soon?
Channel Nine Finance Editor Ross Greenwood correctly predicted the RBA’s decision to keep the rate on hold this month, saying it’s unlikely we will see a rate change within the next 12 months.
Mr Greenwood says the most interesting part of the RBA’s announcement revolved around the recent AUD surge to past 80US cents.
“Normally if that were the case, the Reserve Bank would be cutting interest rates, but it said it will not cut interest rates,” he said.
“But by the same token, it can’t afford to raise interest rates because the economy is so slow.”
Mr Greenwood says the main thing to watch is the Australian dollar, because if it rises “too fast” that will put pressure on the RBA to cut rates, even though they do not want to.