Australia Monetary Policy July 2018

Australia

Australia: RBA continues to hold fire in July

July 3, 2018

At its 3 July monetary policy meeting, the Reserve Bank of Australia (RBA) left the cash rate unchanged at its all-time low of 1.50%, where it has been since August 2016. The move was expected by market analysts.

The Bank’s decision was again underpinned by low inflationary pressures. Inflation remained marginally below the Bank’s 2.0%–3.0% target range in Q1, coming in at 1.9%. Moderate wage growth and strong competition in retailing kept price pressures in check. Although labor market dynamics are positive and labor force participation continues to grow, wage growth has remained modest. However, it could strengthen somewhat going forward, as skills shortages are reported to be growing, and the vacancy rate is high. The RBA expects inflation to rise slightly above 2.0% in 2018.

The Bank reaffirmed, furthermore, that the economy is on track to grow slightly above 3.0% on average in 2018 and 2019, consistent with Q1’s robust 3.1% year-on-year expansion. The positive economic performance is seen being underpinned by growing non-mining business investment, a scaling-up of public infrastructure spending and robust export growth. On the other hand, elevated debt levels and lackluster wage growth will limit the expansion in private consumption. All in all, the pick-up in economic activity will feed through to stronger inflationary pressures only gradually.

The Bank highlighted several downside risks in the communiqué in July: some intensification in inflation globally, uncertainty regarding trade policies in the U.S. and increasing risks in the Chinese financial sector. Nonetheless, the statement was largely devoid of forward guidance. Given that wage growth is expected to eventually gain momentum and inflation should move back within the target range this year, the RBA will likely hike rates gradually in the future, although the timeframe of monetary tightening remains unclear.

FocusEconomics panelists on average expect mild monetary tightening this year, although several panelists expect rates to remain unchanged. Our panelists see the cash rate ending 2018 at 1.70% and 2019 at 2.23%.


Author: Massimo Bassetti, Economist

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Australia Monetary Policy July 2018

Note: RBA Cash Rate in %.
Source: Reserve Bank of Australia (RBA).


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