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RBA decision continues record run of low interest rates

Glenn Freeman  |  03 Apr 2018Text size  Decrease  Increase  |  
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The Reserve Bank of Australia has left the cash rate unchanged at 1.5 per cent, with the central bank board continuing to worry about weak wages growth.

The RBA board's decision, announced following its April board meeting on Tuesday, means Australia's official interest rate has been at a record low for 20 months, newswire service AAP reports.

"One continuing source of uncertainty is the outlook for household consumption, although consumption growth picked up in late 2017. Household income has been growing slowly and debt levels are high," says RBA governor Philip Lowe, in a statement accompanying the announcement.

The RBA notes the Australian economy grew by 2.4 per cent over 2017, and tips faster growth in 2018 amid "positive business conditions" and increasing non-mining business investment.

However, it expects the ongoing period of low wage growth "is likely to continue for a while yet".

"Consistent with this, the rate of wages growth appears to have troughed and there are reports that some employers are finding it more difficult to hire workers with the necessary skills," according to the RBA statement.

This translates into ongoing weakness in household consumption amid slow growth in incomes, accompanied by high levels of household debt.

"The low level of interest rates is continuing to support the Australian economy. Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual."

The RBA board believes maintaining its current monetary policy is "consistent with sustainable growth in the economy and achieving the inflation target over time".

Morningstar expected rate hold

This outcome is consistent with the view of Morningstar's head of equities research, Peter Warnes, who last week wrote that "an increase in official interest rates appears unlikely in 2018".

"Wages and salaries are the lifeblood of household income and the lack of real growth remains a key concern.

"The highly leveraged household sector battles strong and widespread inflationary pressure across necessity expenses," Warnes says.

He expects growth in Australia's household income will remain "below trend and negative in real terms for some time, and this is likely to dictate the actions of the RBA," though suggests "out of cycle rate increases cannot be ruled out."

Industry views

According to Aberdeen Standard Investments' senior investment manager, Jasmin Argyrou: "The RBA…are probably pleased with the level and stability of housing credit growth.

"A hike in the cash rate may seem like a remote possibility, but we think the unemployment rate will soon drop under the weight of strong employment growth, and the higher inflation this foreshadows will see the RBA eventually shift to a tightening bias."

AMP Capital chief economist Shane Oliver also indicated last week that the RBA was “likely to leave rates on hold for the 20th month in a row”, surpassing the previous record of 19 months without change between January 1995 and July 1996.

“High business confidence, strong jobs growth and the RBA's own growth and inflation forecasts argue against a rate cut, but risks around consumer spending, weak wages growth and inflation, the slowing Sydney and Melbourne property markets and the still too high Australian dollar argue against a rate hike,” he said.

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Glenn Freeman is a senior editor at Morningstar.

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

is senior editor for Morningstar Australia

© 2020 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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