Concern over stagnant wage growth has driven the Reserve Bank of Australia to keep the official cash rate at 1.5 per cent for the 18th straight meeting.
The official interest rate has now been at a record low since August 2016, with stronger forecasts for economic growth in 2018 being tempered by persistent concern over the outlook for household consumption.
Reserve Bank governor Phillip Lowe said that a tightening labour market and a slight pick up in consumption growth towards the end of last year were encouraging signs, but that low wage growth was likely to continue “for some time”.
“One continuing source of uncertainty is the outlook for household consumption,” he said. “Although consumption growth picked up in late 2017. Household income has been growing slowly and debt levels are high.”
There’s good news on the horizon though, according to Lowe, who added that the rate of wage growth appears set to recover.
“Notwithstanding the improving labour market, wages growth remains low. This is likely to continue for a while yet, although the stronger economy should see some lift in wages growth over time.
“Consistent with this, the rate of wages growth appears to have troughed and there are reports that some employers are finding it more difficult to hire workers with the necessary skills,” Lowe said.
In its April remarks the RBA singled out equity market volatility on the back of President Donald Trump’s trade policy in the United States, which has triggered sell offs in markets around the world in recent weeks.
The RBA also noted a slowdown in housing markets in Melbourne and Sydney, with nationwide measures for housing prices remaining relatively flat over the last six months.
“In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years,” Lowe said. “APRA’s supervisory measures and tighter credit standards have been helpful in containing the build-up of risk in household balance sheets.”
The RBA does, however, remain confident that the historically low official interest rate is supporting the Australian economy, and that further progress in returning inflation to its target range will be “gradual” in nature.
ANZ’s head of Australian economics David Plank said that the RBA’s commentary indicates that its confidence around the inflation outlook has inched higher.
“The Bank’s confidence about the inflation outlook seems to have lifted a touch. It now notes that inflation ‘has increased in some economies and further increases are expected given the tight labour markets’,” he said.
JP Morgan economist Sally Auld said upcoming retail sales and trade data due out this week would be closely watched by the RBA to ensure the economy is growing in line with its expected 0.8 per cent per quarter.
That rate would require consumption and exports to improve, Ms Auld said, and while she had confidence exports may pick up, the outlook for consumption spending is less positive.
With AAP
