RBA not expected to change rates in the near term

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Summary:

  • RBA maintains interest rates at 1.50%
  • RBA signals that interest rates will remain steady in the near term
  • RBA upbeat on unemployment, expects wage growth to rise
  • Low inflation on account of oil prices, but wage growth could see giving rise to inflation
  • GDP growth consistent with a pickup in non-mining investment

The Reserve Bank of Australia held its monetary policy meeting last week. As widely expected, the central bank left interest rates unchanged at 1.50%. This marked fourteenth consecutive months of interest rates staying put at 1.50%.

Interest rates expected to remain steady in the near term

The central bank signaled that this steady interest rate would continue for some time in the near future on the basis of its neutral bias in the monetary policy statement which said that “the low level of interest rates is continuing to support the Australian economy.”

Australia Interest Rates: 1.50%, September 2017. Source: Tradingeconomics.com

The central bank said that based on the available information, it felt appropriate to hold the rates steady which is expected to be consistent with the current growth forecasts. Rates are likely to be held steady in the near term, at least until the next quarterly inflation and GDP data is released.

This will probably see the markets speculating that a possible RBA rate hike could come over the next quarter, meaning that rates are likely to remain unchanged towards the end of the year.

RBA upbeat on labor market developments

The main take away from the RBA’s meeting was that it was growing more confident in the labor market. The central bank, in its statement, said that employment continued to grow strongly over the recent months, sounding optimistic. The central bank also said that increased employment in all states was consistent with the rise in the labor force participation rate as well.

Although this was some cheer for the market participants who expect the RBA to begin hiking rates, the overall theme was broadly neutral. Just a month ago, the central bank struck an optimistic note stating that it expected the unemployment rate to decline but only gradually over the next few years.

The pace of declines in the unemployment rate is expected to be slow largely due to an increase in the labor participation rate as more people enter the workforce.

Housing market outlook mixed

The central bank also addressed the housing markets at its monetary policy review last week. It said that housing prices in places such as Sydney increased significantly but noted that there were initial signs that conditions were cooling.

This was evident from the fact that prices in Sydney were seen declining in the month of September after staying steady in August. With the exception of Sydney, housing prices elsewhere in Australia were said to vary considerably.

“Housing prices have been rising briskly in some markets, while in others they have been declining,” the RBA said in its monetary policy statement.

Inflation could pick up on higher wages

On inflation, the central bank said that headline consumer prices fell on account of lower oil prices. However, it also noted that core inflation remained lower alongside low wage growth. The central bank said that it expects wages to rise on account of improvements in the labor market. This is expected to rub off onto inflation.

Australia Inflation Rate: 1.9%. Source: Tradingeconomics.com

The RBA said that growth was 0.8% in the quarter ending June 2017 and said that recent data indicated that growth was consistent with a pickup in non-mining investment. With the recent monetary policy statement, the RBA has signaled and potentially put to rest any speculation of a possible rate hike this year.

With the US dollar saw gaining the bullish momentum, this could bode well for the AUD which could potentially help in the economic expansion. But at the same time, the RBA could be seen looking to the first quarter of 2018 for any potential changes to monetary policy.

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About Author

John is a market analyst for Orbex Ltd. and is a forex and equities trader having been involved in trading since late 2009. John makes use of a mix of technical and fundamental analysis and inter-market relationships. The analysis present here is a mix of intra-day analysis while considering the long term outlook of the markets as well. For any comments or questions, John can be reached at [email protected]

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