Interest Rates: The Outlook

At its meeting on Tuesday September 4, the Reserve Bank Board decided to leave the cash rate unchanged at 1.50 percent; this is despite some of the big players such as Westpac and Suncorp raising their rates last week.

Governor of the Reserve Bank, Philip Lowe, reports the decision to keep rates on hold takes into a number of factors including the continuing expansion of the global economy, with a number of advanced economies growing at above-trend rates combined with lower unemployment rates.   Globally, inflation remains low for now, although it has increased in some economies and may increase further if the labour market tightens.

The Bank’s central forecast is for growth of the Australian economy to average a bit above 3 percent in 2018 and 2019. In the first half of 2018, the economy is estimated to have grown at an above trend rate. Business conditions are positive and non-mining business investment is expected to increase. Higher levels of public infrastructure investment are also supporting the economy, as is growth in resource exports. One continuing source of uncertainty is the outlook for household consumption. Household income has been growing slowly and debt levels are high.

Australia’s terms of trade have increased over the past couple of years due to rises in some commodity prices. The outlook for the labour market remains positive. The unemployment rate has fallen to 5.3 percent, the lowest level in almost six years. Wages growth remains low, although it has picked up a little recently. The improvement in the economy should see some further lift in wages growth over time, although this is likely to be a gradual process.

Conditions in the Sydney and Melbourne housing markets have continued to ease, and nationwide measures of rent inflation remain low. Housing credit growth has declined to an annual rate of 5½ percent. This is largely due to reduced demand by investors as the dynamics of the housing market have changed. Lending standards are also tighter than they were a few years ago, and there is competition for borrowers of high credit quality.