Australia Monetary Policy August 2018


Australia: RBA stands pat in August

August 7, 2018

At its 7 August monetary policy meeting, the Reserve Bank of Australia (RBA) left the cash rate unchanged at its all-time low of 1.50%, where it has been since August 2016. The move was widely in line with market expectations.

The Bank’s decision was underpinned by low inflationary pressures and unremarkable wage growth. Recently released inflation data shows that inflation moved within the Bank’s 2.0%–3.0% target range in Q2, but it nevertheless remained moderate, coming in at 2.1%. Weak wage growth and strong competition among retailers continued to keep prices in check. Going forward, wage growth should gain speed as skills shortages are emerging in certain areas. However, the RBA expects inflation to ease somewhat in the months to come thanks to one-off declines in some administered prices.

The Bank reaffirmed its view that the economy is on track to grow slightly above 3.0% on average in both 2018 and 2019, boosted by rising investment in non-mining businesses and public infrastructure, as well as by sustained growth in resource exports. However, elevated debt levels, sluggish wage rises and easing growth in the housing market could weigh on household spending. Overall, the pick-up in economic activity has yet to feed through to stronger inflationary pressures.

The Bank highlighted some downside risks in its communiqué in August, including slowing growth in China and trade protectionism in the U.S. 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 timeframe 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%.

Author: Massimo Bassetti, Senior Economist

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