The Bull

Friday 19

October, 2018 8:12 PM



RBA Governor remains upbeat

RBA Governor remains upbeat

The Reserve Bank Governor Philip Lowe delivered a speech in Adelaide last night.

Share |

02.05.2018 03:51 PM

Reserve Bank Governor remains upbeat
Reserve Bank speech

The Reserve Bank Governor Philip Lowe delivered a speech in Adelaide last night.

Key points

Statement on Monetary Policy: Governor Lowe flagged changes to the format of the report to “make the report more thematic”.

Forecasts: “The latest forecasts should not contain any surprises, with only small changes from the previous set of forecasts, issued three months ago. This year and next, our central scenario remains for the Australian economy to grow a bit faster than 3 per cent…. Inflation is expected to remain low, at around its current level for a while yet, before gradually increasing over the next couple of years, towards 2½ per cent.”

Inflation outlook: “….inflation has troughed, although it remains low. Strong competition in retailing is holding down the prices of many goods: for example, over the past year, the price of food increased by just ½ per cent, the price of clothing and footwear fell 3½ per cent and the price of household appliances fell 2½ per cent. Importantly, these outcomes are helping to offset some of the cost of living pressures arising from higher electricity prices, which nationally are up 12 per cent over the past year.”

Wages outlook: “And in terms of the inflation target, it is difficult to see how a continuation of 2 per cent growth in wages is compatible with us achieving the midpoint of the inflation target – 2½ per cent – on a sustained basis…. we are hearing a few more reports of larger increases in those areas where there is a shortage of workers with the necessary skills. After all, the laws of supply and demand still work. We also see evidence in the aggregate data that wages growth has troughed and we expect to see a further pick-up. This is likely to be a gradual process, though.”

Household sector: “Domestically, for some time, we have seen the main risk to be related to household balance sheets. For a while, trends in household credit were quite concerning. On this front, things now look less worrying than they were a while back, although the level of household debt remains very high, which carries certain risks.”

Overseas risks: Risks basically lie in the “international arena”. The Governor highlighted protectionism and Chinese debt as well as the domestic risk of high household debt.

Tighter conditions? “In terms of financing, we also discussed the potential for some tightening in financial conditions in Australia. In the United States, the cost of US dollar funding has increased for reasons not directly related to monetary policy and this increase is flowing through into higher money market rates in Australia. We expect some of this to be reversed in time, although it is difficult to tell by how much and when. It is also possible that lending standards in Australia will be tightened further in the context of the current high level of public scrutiny. We will continue to watch these issues carefully.”

“Gradual” is the word: “The other key point is that the progress we are making is only gradual: our central scenario is for a gradual pick-up in wages growth, a gradual lift in inflation, and a gradual reduction in the unemployment rate.”

Interest rates outlook: “If this is how things turn out, it is reasonable to expect that the next move in interest rates will be up…the best contribution we can make to the welfare of the Australian people is to hold the cash rate steady and for the Reserve Bank to be a source of stability and confidence.”

What does it all mean?

Interest rates are on hold. The next move in rates is up if the RBAs scenario plays out. The Reserve Bank Governor remains upbeat, expecting the economy to grow by around 3 per cent in 2018 and 2019. Interestingly, the presumed “speed limit” of the economy – the point where inflation starts to rise – is around 2.75 per cent. 

Published by Ryan Felsman, Senior Economist, CommSec
Archive
Markets
Index: Points Change Percent

PLEASE SUPPORT OUR SPONSORS, AUSTRALIA'S LEADING BROKERS:



© Copyright TheBull.com.au. All rights reserved.