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November, 201711:01 AM

RBA Statement on Monetary Policy

RBA Statement on Monetary Policy

The Reserve Bank has made minimal changes to its economic growth forecasts.

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10.11.2017 05:05 PM

Reserve Bank on hold for an extended period
RBA Statement on Monetary Policy

Forecasts: The Reserve Bank has made minimal changes to its economic growth forecasts. Economic activity is expected to pick-up with growth of 3.25-3.5 per cent expected in late 2018 and 2019.

Underlying inflation: is expected to hold at 1.75 per cent over the majority of the forecast period before lifting to 2.0 per cent in June 2019.

What does it all mean?

The Reserve Bank appears comfortable with its current ‘neutral’ monetary policy settings.

While the Board has maintained its fairly optimistic assessment of current domestic economic activity and conditions, our view is that interest rates are firmly on hold for an extended period.

The Bank remains confident that economic growth will surpass its 2.75 per cent ‘speed limit’, rising to 3.25 per cent by the end of 2018, before accelerating to 3.5 per cent by mid-2019. Strong government spending on infrastructure projects and construction works, together with a continued rebound in non-mining business investment are expected to drive growth.

The drag from mining investment will recede amid a continued recovery in the resources sector. Commodity
prices have rebounded. Mining activity is expected to contribute positively to growth going forward.

While dwelling investment appears to have peaked, residential construction activity is likely to remain strong over the next 12 months, given a significant pipeline of construction work.

Employment growth continues to be a ‘bright spot’ for the Aussie economy with 372,000 jobs created over the past 12 months. The Reserve Bank has revised up its jobs growth forecasts due to stronger leading indicators of employment and stronger hiring intentions. However the central bank expects the unemployment rate to remain unchanged at its current level of 5.5 per cent through to mid-2019, before falling to 5.25 per cent in late 2019.

Despite subdued income growth, elevated household debt and restrained spending, household consumption is expected to rise gradually as wages growth picks-up. The Bank acknowledges that there is some uncertainty around consumers, whom are very cautious at present, as reflected in recent confidence and sentiment surveys. 

Underlying inflation is now forecast to rise at an annual pace of 1.75 percent through to the end of 2018, below the Reserve Bank’s 2-3 per cent target band. The previous forecast was for annual underlying inflation of 1.5-2.5 per cent over the period.

Headline inflation is expected to gradually increase from 2.0 per cent to 2.25 per cent by the end of 2018, remaining at this level throughout 2019. This is at the bottom end of the Bank’s target range and lower than the 2-3 percent forecast previously for 2019.

The gradual pick-up in headline inflation is likely to occur on the back of tobacco excise increases, rising oil and utilities prices. Wages growth is expected to pick-up gradually, supported by a tightening in the labour market due to strong employment growth and the recent 3.3 per cent increase to the national minimum wage from July 1.

The Reserve Bank also highlighted the challenging landscape for Aussie retailers. Retailers have been successful in cutting costs, allowing prices to fall. But strong local and global competition is also serving to keep prices low. The entry of new foreign retailers, such as Amazon, will only intensify competition and aggressive discounting. The increased supply of rental housing will likely keep rent inflation low too.

The downward revisions to the inflation outlook also largely reflected the re-weighting of the consumer price index by the Australian Bureau of Statistics, the first in five years. 

What do the figures show?

Key takeaways from the Reserve Bank report
Below are our key “takeaways” from the Reserve Bank’s latest quarterly review.

“The Australian economy is expected to expand at a solid pace over the next couple of years, and labour market developments have been quite positive of late.”

“Quarterly GDP growth is expected to have eased slightly in the September quarter. Beyond that, growth is forecast to average about 3 per cent over the next couple of years.”

“Inflation and wage growth remain low. Both are expected to increase only gradually over time.”

“Wage growth has remained low and strong competition in the retail sector is dampening retail inflation across a broad range of goods.

“Stronger labour market conditions are nonetheless expected to lead to a pick-up in wage growth over time.” 

“Labour market conditions have strengthened considerably in recent months.”

“Headline inflation could also be a bit higher in the December quarter because petrol prices have risen noticeably in recent weeks.”

“The outlook for business investment looks to be more positive than it has for some time. Reported business conditions are at a high level.”

“A considerable amount of public infrastructure work is planned or underway, particularly in the south eastern states.”

“If the exchange rate were to appreciate further, economic activity and inflation would be likely to pick up more slowly than currently forecast.”

“Over the period ahead, further progress on reducing spare capacity in the economy is expected, which in turn would support the forecast gradual increase in inflation.”

What is the importance of the economic data?

The Reserve Bank releases its Statement on Monetary Policy each quarter. The Statement is the Reserve Bank’s assessment of economic and financial conditions and also contains the latest inflation views. The Statement is crucial is assessing the short-term outlook for interest rates.

What are the implications for interest rates and investors?

The Reserve Bank is cautiously optimistic about the Aussie economy. Annual growth is forecast to average over 3 per cent by the end of 2018, almost double the current pace. That said, inflation is expected to remain contained for some time. We expect interest rates to remain unchanged for the forseeable future.

Some would say a combination of record low interest rates, falling goods prices, improving economic growth and a low jobless rate is close to economic nirvana.

Originally published by Ryan Felsman, Senior Economist, CommSec
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