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Australia Monetary Policy November 2018

Australia: RBA holds the policy rate stable in November

At its 6 November monetary policy meeting, the Reserve Bank of Australia (RBA) left the cash rate unchanged at the all-time low of 1.50% where it has been for over two years. The move was in line with market expectations.

The Bank’s decision came amid subdued inflationary pressures and sluggish consumer spending despite a solid labor market and some pick-up in wage growth. Inflation came in at 1.9% in the third quarter, also due to declines in some administered prices, down from Q2’s 2.1%. It thus moved slightly below the lower bound of the Bank’s 2.0%–3.0% target. However, the Bank expects inflation to trend somewhat above 2.0% in 2019, before accelerating moderately in 2020. Lastly, the Bank reaffirmed its view that the economy is expanding solidly, thanks to strong resource exports and business and infrastructure investment, and projects an expansion of just above 3.0% on average this year and next, before slowing in 2020. Nevertheless, economic activity growth is not likely to translate into higher inflation in the short-term.

The Reserve Bank of Australia again highlighted the uncertainty surrounding U.S. international trade policy and slower Chinese growth as downside risks to the global outlook. Although the communiqué was devoid of any further forward guidance, inflationary pressures should eventually rise given that the labor market is expected to continue tightening in the medium-term, putting increasing pressure on wages. In the face of a slowly tightening labor market and an expected pick-up in wages, the Bank is thus likely to enter a gradual tightening cycle next year.

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