Australia Monetary Policy March 2018

Australia

Australia: RBA keeps rates unchanged in March

March 6, 2018

At its 6 March monetary policy meeting, the Reserve Bank of Australia (RBA) kept the cash rate at its all-time low of 1.50%, where it has been since August 2016. The decision was in line with market expectations.

The RBA’s decision came as price pressures remained mild. Inflation tracked slightly below the 2.0–3.0% target range from Q2–Q4 despite the loose monetary stance, and has likely remained subdued so far this year, dampened further by the recent recalibration of weights used to calculate the CPI index. Low inflation is being caused in part by the absence of wage pressures; earnings grew a tepid 2.1% annually in the final three months of last year. On the demand side, the economy’s performance has been mediocre, as demonstrated by recent data (released after the RBA’s meeting) showing quarter-on-quarter growth undershot expectations in Q4. By keeping interest rates low, the Central Bank aims to nurse inflation back to the target range and support the economy.

The Bank’s communiqué was largely devoid of forward guidance. The RBA once more pointed out that regulatory changes implemented by the Prudential Regulation Authority are succeeding in cooling the housing market and reducing borrowers’ risk profiles. This should ease the pressure on the Bank to raise rates in the short term. Looking ahead, wage growth is likely to pick up as the labor market tightens further and capacity constraints emerge; indeed, the Bank highlighted that some signs of hiring difficulties are already appearing. Coupled with a stronger economy, this should see inflation move back within the target range this year. As a result, the RBA is likely to raise rates going forward, although any tightening will be gradual and modest in scope.

On average, FocusEconomics panelists 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:, Economist

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Australia Monetary Policy Chart


Australia Monetary Policy March 2018

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


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