Australia Monetary Policy May 2018


Australia: RBA keeps rates unchanged in May on low inflation and more moderate employment growth

May 1, 2018

At its 1 May 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 was underpinned by persistent moderate price pressures. Inflation came in at 1.9% in Q1, matching the previous quarter’s reading and slightly below the Bank’s 2.0%–3.0% target range despite the loose monetary stance. Softer increases in housing and transport prices offset faster growth in food prices. Likewise, core inflation remained below the 2.0% threshold. Also underpinning the RBA’s decision to stand pat was low wage growth, which the Reserve Bank expects to persist going forward. With its decision, the RBA aims to bring inflation back to the target range.

As for economic activity, favorable business conditions are supporting an expansion in non-mining business investment, while rising public infrastructure spending is also underpinning growth. Moreover, solid increases in retail sales in the first two months of the year suggest consumer spending is continuing to expand healthily. However, private consumption is being supported by rising debt levels rather than income growth, which remains subdued. Furthermore, in the past few months job creation weakened; in March, the unemployment rate inched up to 5.6%.

The Bank’s communiqué was unchanged from April and largely devoid of forward guidance. Due to supervisory measures and tighter credit standards by the Prudential Regulation Authority, housing prices remained broadly stable over the past few months, easing pressure on the Bank to raise rates in the short term. Moreover, wage growth is expected to remain low, although tightening labor market conditions and growing hiring difficulties should lead to some pick-up in wage growth. Consequently, the Bank sees inflation moving 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.

Australia Interest Rate Forecast

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: Massimo Bassetti, Senior Economist

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