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Australia Monetary Policy December 2018

Australia: RBA holds the policy rate stable in December

At its 4 December monetary policy meeting, the Reserve Bank of Australia (RBA) again left the cash rate unchanged at the all-time low of 1.50% where it has been for over two years. The move matched market expectations.

The Bank’s decision came amid moderate inflation, falling house prices and subdued consumer spending despite a solid labor market and some pick-up in wage growth. Inflation slowed from 2.1% in the second quarter to 1.9% in the third quarter, also due to a fall in some administered prices. It therefore moved slightly below the lower bound of the Bank’s 2.0%–3.0% target. Moreover, housing prices in the east coast continue to decline, also due to dwindling appetite among investors. That said, the Bank expects inflation to move slightly above 2.0% in 2019, before accelerating further in 2020. The Bank also considers the economy to be performing solidly, supported by strong resource exports and non-mining business and infrastructure investment. It projects an expansion of around 3.5% on average this year and next, although sees the economy losing some pace in 2020.

The Reserve Bank of Australia noted global trade is showing some signs of weakening. This, coupled with softening growth in China, represent the main downside risks to the global outlook. Although the communiqué was again devoid of any further forward guidance, the continuous tightening in labor market conditions should gradually fuel faster wage hikes in the medium-term, translating into higher inflation. In the face of a tightening labor market and an expected pick-up in wages, the Bank is thus likely to enter a gradual tightening cycle next year.

Australia Interest Rate Forecast

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