Patient RBA may hold rates steady in 2018

Drew Cratchley
(Australian Associated Press)

The Reserve Bank of Australia may not begin lifting interest rates until 2019 after reinforcing its expectations for only gradual improvement in wages growth and inflation over the year ahead.

The central bank’s cash rate remained at a record low of 1.5 per cent for a 19th consecutive month on Tuesday after its board decided to make no change.

Governor Philip Lowe’s accompanying statement again portrayed optimism for the global economy and domestic jobs market, and noted the slowing growth in home prices – particularly in Sydney and Melbourne.

He said the RBA expects the Australian economy to grow at a faster rate in 2018 than it did in 2017, though inflation is expected to rise only slightly to just above two per cent.

Dr Lowe said jobs growth has been strong and that trend should continue, but wage growth remains low.

“This is likely to continue for a while yet, although the stronger economy should see some lift in wage growth over time,” he said in the statement.

“Consistent with this, the rate of wage growth appears to have troughed and there are reports that some employers are finding it more difficult to hire workers with the necessary skills.”

Chief Asia-Pacific macro strategist at TD Securities, Annette Beacher, said Dr Lowe’s statement contained no surprises and illustrated the RBA’s patient stance on rate hikes.

“In our view, the macro observations on balance confirm the governor’s long-held view that the next move remains up for the cash rate, but the use of ‘gradual’ three times tells us that they are in no hurry to hike just yet,” she said.

St George chief economist Besa Deda said financial markets currently see the probability of a rate hike by the end of 2018 at 63 per cent, much lower than three months ago.

“We remain comfortable with our long held view that the RBA will take its time in starting a rate hike cycle. Financial markets appear to be coming round to this view too,” she said.

The Australian dollar was relatively steady following the RBA’s announcement.


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