Australia keeps rate steady, confirms willing to cut again

September 3, 2019

By CentralBankNews.info

Australia’s central bank left its benchmark cash rate unchanged at a record low of 1.0 percent and confirmed its guidance from last month that it is willing to cut rates further if needed to support economic growth and reach its inflation target.
The Reserve Bank of Australia (RBA), which cut its rate in June and July by a total of 50 points before holding it steady in August, also reiterated that it expects to keep interest rates low “for an extended period” to help reduce unemployment and make progress in boosting inflation.
As in August, RBA Governor Philip Lowe described the outlook for the global economy as “reasonable,” but the risks remains tilted to the downside as trade and technology disputes are affecting international trade and investment as businesses scale back spending due to uncertainty.
Australia’s economy slowed sharply in the first half of this year with gross domestic product up by only 1.8 percent year-on-year in the first quarter, down from 2.3 percent in the previous quarter.
But in its monetary policy statement from last year the RBA said growth was likely to have troughed in the middle of this year and forecast growth of 2.4 percent this year and 2.75 percent next year, supported by low interest rates, tax cuts, infrastructure spending, stabilization of the housing market and a brighter outlook for the resources sector.
Sluggish growth has kept a lid on inflation, which is expected to remain subdued for some time, hitting a little under 2 percent in 2020 and a little above 2 percent in 2021.
Headline inflation rose to 1.6 percent in the second quarter from 1.3 percent in the first quarter, but is still below RBA’s target of 2.0 to 3.0 percent.
Australia’s dollar firmed slightly in response to the RBA’s decision, which was largely as expected, to around 1.49 to the U.S. dollar, down 4.7 percent this year.

The Reserve Bank of Australia issued the following statement by its governor, Philip Lowe:

“At its meeting today, the Board decided to leave the cash rate unchanged at 1.00 per cent.
The outlook for the global economy remains reasonable, although the risks are tilted to the downside. The trade and technology disputes are affecting international trade flows and investment as businesses scale back spending plans due to the increased uncertainty. At the same time, in most advanced economies, unemployment rates are low and wages growth has picked up, although inflation remains low. In China, the authorities have taken further steps to support the economy, while continuing to address risks in the financial system.
Global financial conditions remain accommodative. The persistent downside risks to the global economy combined with subdued inflation have led a number of central banks to reduce interest rates this year and further monetary easing is widely expected. Long-term government bond yields have declined and are at record lows in many countries, including Australia. Borrowing rates for both businesses and households are also at historically low levels. The Australian dollar is at its lowest level of recent times.
Economic growth in Australia over the first half of this year has been lower than earlier expected, with household consumption weighed down by a protracted period of low income growth and declining housing prices and turnover. Looking forward, growth in Australia is expected to strengthen gradually to be around trend over the next couple of years. The outlook is being supported by the low level of interest rates, recent tax cuts, ongoing spending on infrastructure, signs of stabilisation in some established housing markets and a brighter outlook for the resources sector. The main domestic uncertainty continues to be the outlook for consumption, although a pick-up in growth in household disposable income and a stabilisation of the housing market are expected to support spending.
Employment has grown strongly over recent years and labour force participation is at a record high. The unemployment rate has, however, remained steady at 5.2 per cent over recent months. Wages growth remains subdued and there is little upward pressure at present, with strong labour demand being met by more supply. Caps on wages growth are also affecting public-sector pay outcomes across the country. A further gradual lift in wages growth would be a welcome development. Taken together, recent labour market outcomes suggest that the Australian economy can sustain lower rates of unemployment and underemployment.
Inflation pressures remain subdued and this is likely to be the case for some time yet. In both headline and underlying terms, inflation is expected to be a little under 2 per cent over 2020 and a little above 2 per cent over 2021.
There are further signs of a turnaround in established housing markets, especially in Sydney and Melbourne. In contrast, new dwelling activity has weakened. Growth in housing credit remains low. Demand for credit by investors continues to be subdued and credit conditions, especially for small and medium-sized businesses, remain tight. Mortgage rates are at record lows and there is strong competition for borrowers of high credit quality.
It is reasonable to expect that an extended period of low interest rates will be required in Australia to make progress in reducing unemployment and achieve more assured progress towards the inflation target. The Board will continue to monitor developments, including in the labour market, and ease monetary policy further if needed to support sustainable growth in the economy and the achievement of the inflation target over time.”

 


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