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Rates on hold for a lot longer, RBA believes
The Australian 12:00am October 18, 2017
David Uren
The Reserve Bank believes it can keep its benchmark cash rate at its record low of 1.5 per cent for a lot longer and says it is under no pressure to follow global peers like the central banks in the United States and Canada in raising rates.
The minutes of the bank’s last board meeting, released yesterday, show it remains optimistic about Australia’s economic outlook but expects only a very gradual return of inflation to the middle of its target 2 to 3 per cent band.
The Reserve Bank has used the minutes to quash speculation that it was preparing to lift rates for the first time since 2010 as part of a global move to return interest rates to more normal levels.
The minutes noted that the US Federal Reserve was still expecting to lift rates again this year, while the Bank of Canada had raised rates for the second time this year in September. The Bank of England had also foreshadowed rate increases while the European Central Bank is expected to start winding down its bond purchases.
“The actual and expected removal of monetary policy stimulus had contributed to the increase in long-term government bond yields across the major markets,” including in Australia, the minutes said.
The minutes described the increase in rates as a “welcome development” but said it “did not have mechanical implications for the setting of policy in Australia, where the timing of any changes in interest rates would be dependent as always on developments in domestic economic conditions”.
Flagging that the Reserve Bank was under less pressure to lift rates than other central banks, the minutes added, “monetary conditions in other advanced economies had been eased significantly more than in Australia since the onset of the financial crisis’’.
The Reserve Bank believes the economy remains on track to achieve a return to 3 per cent growth, saying the 0.8 per cent increase in GDP in the June quarter national accounts was consistent with its forecasts.
Employment growth was strong and was expected to continue at an above average rate while the Reserve Bank is also confident that a lift in non-resource business investment will continue.
It highlighted the role of major public sector infrastructure projects which would continue to support economic growth over coming years.
It expects wage growth to gradually improve but low inflation continues to justify the record low cash rate.
The minutes say the Reserve Bank board is giving close attention to the growth in household debt which is continuing to outpace income growth despite some easing in investor borrowing.
