Steady economy points to steady cash rate

The Reserve Bank has hinted that it is likely to leave the official cash rate at a record-low 1.50 per cent for the foreseeable future.

Board members believe that although some economic indicators are bouncing around, the overall outlook for the economy remains steady, according to minutes from the board’s 2 May meeting, which were released today.

Here’s what the board had to say about the different economic indicators:

Housing

Conditions in established housing markets in Sydney and Melbourne remain robust, while Perth prices are continuing to fall.

The large increase in the supply of apartments in the inner-city of Melbourne and Brisbane is putting downwards pressure on prices and rents, particularly in Brisbane.

Economic growth

Recent data suggests the Australian economy grew at a moderate pace at the beginning of 2017 – an outlook that is little changed from three months earlier.

The pick-up in non-mining business investment has been modest and forward-looking indicators of investment remain mixed.

Unemployment

Unemployment has edged slightly higher in recent months to 5.9 per cent, but it is expected to fall gradually.

Wages growth is expected to increase gradually as labour market conditions improve.

Inflation

Underlying inflation is expected to gradually increase from its current rate of 1.75 per cent, which is below the Reserve Bank’s target band of 2-3 per cent.

Weak growth in wages is being offset by rises in utilities prices and residential building costs.

Household debt

Households are increasing their debts faster than their incomes, which suggests that the risks associated with household debt are rising.

Households have been reducing their spending, although consumption is still forecast to expand at a bit above its average rate of recent years.

International conditions

Economic growth in Australia’s major trading partners has picked up since mid-2016.

Most forecasters have increased their forecasts for global growth.

Future decisions on interest rates

During the 2 May meeting, board members noted that financial market pricing indicated that market participants expected the cash rate to remain at 1.50 per cent for the rest of 2017.

Board members said that developments in the labour and housing markets warranted careful monitoring.

They also noted that keeping the cash rate at 1.50 per cent “would be consistent with achieving sustainable growth and the inflation target over time”.

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