Australia: RBA holds the policy rate stable in October
October 2, 2018
At its 2 October 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 was motivated by low inflationary pressures and uncertainty surrounding the robustness of consumer spending due to muted wage growth despite solid labor market dynamics. Inflation moved within the Bank’s 2.0%–3.0% target range in Q2; however, at 2.1%, it remained close to the lower band and it was likely kept in check in Q3 by one-off declines in some administered prices. Going forward, wage growth should strengthen somewhat amid skills shortages in certain areas and high vacancy rates. Consequently, the RBA expects inflation to stay above 2% in both 2019 and 2020.
Economic activity was buoyant in Q2, buttressed by household and government spending, and the Bank expects the economy to grow slightly above 3.0% on average in both 2018 and 2019, supported by solid investment in non-mining businesses and public infrastructure, as well as by sustained growth in resource exports. However, high debt levels, low wage growth and easing conditions in the housing market could weaken in household spending. Overall, the robust economic performance has not yet fed through to stronger inflationary pressures.
The Bank highlighted some downside risks in its communiqué in October, including slowing growth in China and trade protectionism in the United States. Nonetheless, the statement was largely devoid of forward guidance. Given that wage growth is expected to eventually gain momentum and inflation should pick up only in 2019 and 2020, the RBA will likely maintain its current monetary policy stance in the short-term and hike rates gradually in the future, although the time frame of monetary tightening remains unclear.
Australia Interest Rate Forecast
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%.