RBA Keeps Eye On Inflation As It Leaves Rates On Hold

reserve bank of australia cash rate

The cash rate remains steady on hold at 1.5% for the eighth consecutive month as the Reserve Bank of Australia (RBA) keeps an eye on inflation.

In his statement delivered yesterday, RBA governor Philip Lowe provided another upbeat survey of the global economy and said Australia’s expansion would increase towards 3 per cent over the next few years, pushing inflation higher.

“There has been a broad-based pick-up in the global economy since last year. Labour markets have tightened further in many countries and forecasts for global growth have been revised up. Above-trend growth is expected in a number of advanced economies…”

Turning towards the Australian economy, the governor remained optimistic predicting growth “to increase gradually over the next couple of years to a little above 3 per cent.”

He noted a shifting economy away from the decline in mining investment coming to an end and exports of resources picking up.

“Growth in consumption is expected to remain moderate and broadly in line with incomes. Non-mining investment remains low as a share of GDP and a stronger pick-up would be welcome.”

Reflecting on the housing market, he noted the outlook continues to be supported by the low level of interest rates.

As has been the recommendation of watchdog APRA, banks have begun clamping down on their investor loan books;

“Lenders have announced increases in mortgage rates, particularly those paid by investors and on interest-only loans. The depreciation of the exchange rate since 2013 has also assisted the economy in its transition following the mining investment boom. An appreciating exchange rate would complicate this adjustment.”

In line with the Bank’s expectations, inflation picked up to above 2 per cent in the March quarter.

“In underlying terms, inflation is running at around 1¾ per cent, a little higher than last year. A gradual further increase in underlying inflation is expected as the economy strengthens.”

Refraining from the mention of any sort of ‘housing bubble’, the governor instead quite rightly acknowledged that the housing market remains fragmented and continues “to vary considerably around the country” – something many commentators fail to recognise.

“Prices have been rising briskly in some markets and declining in others”, noting that in the eastern capital cities (particularly Melbourne, Sydney & Brisbane), there was a substantial supply of additional apartments scheduled to come into the market over the next couple of years.

You can read the full monetary policy statement by Philip Lowe here.