Australia: RBA stands pat in May
May 8, 2019
At its 7 May monetary policy meeting, the Reserve Bank of Australia (RBA) left the cash rate unchanged at an all-time low of 1.50%, where it has been for over two years. The move bucked market expectations of a rate cut due to low inflation; however, the RBA did not rule out a rate cut in case the labor market underperforms.
Despite subdued inflation in Q1, a strong labor market, some pick-up in wage growth and favorable financing conditions were behind the Bank’s decision. Inflation moved further below the Bank’s 2.0%–3.0% target in the first quarter, coming in at 1.3% from Q4’s 1.8%. Meanwhile, consumer spending seems to have weakened further, as suggested by weak retail sales data Q1—a consequence of the continued correction in the real estate market and a high debt stock. That said, the unemployment rate remained fairly low and jobs gains were solid. Moreover, robust non-mining business and infrastructure investment continues to sustain activity. Against this backdrop, the Bank projects underlying inflation of 1.8% in 2019, before accelerating to 2.0% in 2020.
The Reserve Bank of Australia cited weakening global trade and investment intentions, as well as softening growth in China, as the main downside risks to the global outlook. The communiqué suggests the RBA will maintain a loose monetary policy stance in the near-term. This, together with a pick-up in wage growth, should gradually bring inflation within the RBA’s 2.0%–3.0% target.
Australia Interest Rate Forecast
FocusEconomics panelists, on average, expect mild monetary loosening this year, although several panelists expect rates to remain unchanged. Our panelists see the cash rate ending 2019 at 1.40% and 2020 at 1.52%.