The Reserve Bank of Australia has left its cash rate steady at 1.5 per cent for the fifth consecutive board meeting as it prepares to release forecasts showing economic growth picking up and inflation climbing from 1.5 per cent to more than 2 per cent.
In a statement released after the board meeting, Governor Philip Lowe said economic growth was forecast to centre around 3 per cent for the next couple of years, well up from the September-quarter figure of 1.8 per cent and the central forecast of 2.4 per cent in the Scope BusinessDay economists' forecasting survey.
More BusinessDay Videos
Lower growth, less revenue
Leading Australian economists are more pessimistic about the Australian economy than the official Treasury position. Peter Martin explains.
The Australian dollar lifted to US76.62¢, from around US76.40¢ just before the announcement, as markets widened the odds on another policy easing.
The governor will release his updated forecasts on Friday along with a statement outlining his thinking about the year ahead. He will also outline his thinking in a speech to be delivered in Sydney on Thursday night.
Dr Lowe's statement on Tuesday said growth would be boosted by further increases in resource exports and by the period of declining mining investment coming to an end.
"Consumption growth is expected to pick up from recent outcomes, but to remain moderate. Some further pick-up in non-mining business investment is also expected," he said.
"The unemployment rate has moved a little higher recently, but growth in full-time employment turned positive late in 2016. The forward-looking indicators point to continued expansion in employment over the period ahead."
Although Sydney and Melbourne house prices were climbing at double-digit rates, Governor Lowe said conditions varied around the country.
![RBA governor Philip Lowe delivered his speech to international investors in Sydney for the A50 Economic Forum.](/web/20170209125317im_/http://www.smh.com.au/content/dam/images/g/s/q/1/6/v/image.related.articleLeadwide.620x349.gu7b29.png/1486630557298.jpg)
"In some markets, conditions have strengthened further and prices are rising briskly. In other markets, prices are declining. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. Growth in rents is the slowest for a couple of decades," he said.
While acknowledging that borrowing by investors was climbing again after falling in the wake of moves by the Australian Prudential Regulation Authority to impose tighter standards, he said some lenders were taking a more cautious attitude to lending in certain segments.
Tim Lawless, research director at property specialist CoreLogic, said the decision to leave rates unchanged reflected both rapidly climbing prices and a resurgence in lending to investors.
"With inflation consistently tracking below the bank's target range for almost three years, it's likely that the heat in the housing market is one of the primary reasons why the cash rate hasn't moved lower in an attempt to stimulate spending and push inflation higher," he said.
"CoreLogic reported capital city dwelling values were 10.7 per cent higher over the past 12Â months, which is a substantially higher growth rate than the 7.4 per cent recorded over the same period a year ago. The acceleration highlights that housing market conditions have rebounded in line with the previous rate cuts and the consistent rise in investor participation.
"While any further rebound in the headline rate of growth would be unwelcome, some cities could have used the additional stimulus of a cash rate cut. Housing market conditions in Perth and Darwin have been weak since 2014, with dwelling values having fallen in both cities over the past twelve months."
Dr Lowe said the positive outlook was supported by the bank's two previous interest rate cuts in 2016 and the depreciation of the exchange rate since 2013. An appreciating exchange rate "would complicate this adjustment".
ANZ Research senior economist Felicity Emmett said she expected rates to remain on hold for some time given persistently low domestic inflation.
While the RBA's statement was more upbeat on the global economy, on the domestic front, the outlook was largely unchanged.Â
"Given the bank currently only has the mid-point of its underlying inflation forecasts returning to the bottom of the band over the forecast period, our interpretation is that it maintains an easing bias. But the slightly better global dynamics (albeit in an environment of heightened political risk), the lift to national income from higher commodity prices and the risks around house prices suggest that the bank will not act on that bias," she wrote.
Commonwealth Bank senior economist Gareth Aird said he believed the hurdle for another rate cut was higher than last year.
"With the Fed tightening further in 2017, firmer commodity prices, public infrastructure spending lifting and continued strength in the housing market, we see the RBA content to leave rates on hold despite inflation undershooting the target," Mr Aird said.
"The risk, however, sits with easing over the next six months ... Any loss of momentum in the labour market, coupled with some cooling in the housing market, could see policy easing come back on the table."
10 comments
New User? Sign up