Australia's central bank keeps rate steady

Table 12

Table 12

Conditions in the global economy are continuing to improve.

Wage growth remains subdued in most countries, as does core inflation.

Recent strong GDP data is probably not going to be enough to encourage a rate rise, despite coming out up by 0.3% on the previous month - against 0.2% forecast - and 1.7% higher on an annualized basis as this is still well below the rate of inflation which is circa 2.7%.

The Bank's forecasts for the Australian economy are largely unchanged. The transition to lower levels of mining investment following the mining investment boom is nearly complete, with some large LNG projects now close to completion. Corporate profits are surging while measures of business confidence and conditions are the strongest since 2008.

The key is how business investment plans evolve over the coming year.

"One source of uncertainty for the domestic economy is the outlook for consumption". Although jobs growth is picking up and the unemployment rate is expected to edge lower over the next couple of years, wages growth remains feeble. Wage growth low and likely to continue like that for a while.

PMI's are now broadly range bound around the 53-4 level for all three sectors and they are expected to remain around those levels.

Inflation is expected to pick up gradually as the economy strengthens. Higher prices for electricity and tobacco are expected to boost CPI inflation. But Dr Lowe noted that "a factor working in the other direction is increased competition from new entrants in the retail industry".

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"With the Australian dollar having rallied by 4¢ against the United States dollar since the last board meeting, the central bank could easily have shifted to more aggressively jawboning the currency if they were worried".

"While growth was weaker than expected in the March quarter, recent data suggests its back on track - which reduces pressure to cut rates again, but there are risks around the consumer", Mr Oliver said. In addition the Reserve Bank made it clear that the higher Aussie would result in weaker inflation outcomes - in other words the higher Australian dollar is essentially a quasi-rate hike on the economy.

He also mentioned that problems still existed despite regulatory efforts to rein in rising levels of household debt. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years.

Nicholas Gruen, CEO of Lateral Economics, was far more succinct when explaining why he believed rates would remain steady. "We expect interest rates to remain on hold in the short to medium term".

And he did point to the disturbing trend that "growth in housing debt has been outpacing the slow growth in household incomes".

Yet the RBA has also played down any chance of a cut in interest rates to curb the dollar, in large part for fear of inflating a debt-driven bubble in the housing market.

The phrase that "holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time" is likely to be repeated word-for-word.

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