Monday, February 5, 2018

Australia holds rate, sees growth 'a bit above' 3 percent

      Australia's central bank left its benchmark cash rate at 1.50 percent, as expected, but inched up its outlook for economic growth over the next couple of years to "a bit above 3 percent," on positive business conditions and further improvement in the outlook for non-mining business investment.
       The Reserve Bank of Australia (RBA), which has kept its rate steady since lowering it in August 2016, also said it remains optimistic that unemployment will continue to fall and inflation will return to target although "this progress is likely to be gradual."
       Today's statement by RBA Governor Philip Lowe that growth will be over 3 percent in coming years compares with its last statement from December when it said growth was expected to average around 3 percent over the next few years.
        Lowe added recent economic data is consistent with this outlook for growth and increased public investment in infrastructure is also supporting the economy. The outlook for household consumption, however, is uncertain as incomes are only growing slowly and debt remains high.
       Australia's economy has been benefitting from rising demand for its raw materials on the back of an improving global economy, with Gross Domestic Product up by an annual rate of 2.8 percent in the third quarter of last year, up from 1.9 percent in the second quarter.
       Inflation in Australia has remained subdued in the last few years with the headline rate up to 1.9 percent in the last quarter of 2017 from 1.8 percent in the third quarter.
       The RBA said inflation is likely to remain low for some time but then gradually pick up as the economy strengthens.
       "The central forecast is for CPI inflation to be a bit above 2 per cent in 2018," Lowe said.
        The RBA targets inflation of 2-3 percent.
       As in recent months, Lowe cautioned that the rise in the exchange rate of the Australian dollar, known as the Aussie, would likely result in a slower pick-up in economic activity and inflation than currently forecast.
       The Aussie, has been firming steadily since January 2016 although it has fallen in recent days. Nevertheless it remains 0.8 percent higher than at the beginning of this year at 1.27 to the U.S. dollar and up 9.5 percent since the start of 2017.

       The Reserve Bank of Australia issued the following statement by its governor, Philip Lowe:

"At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.

There was a broad-based pick-up in the global economy in 2017. A number of advanced economies are growing at an above-trend rate and unemployment rates are low. Growth has also picked up in the Asian economies, partly supported by increased international trade. The Chinese economy continues to grow solidly, with the authorities paying increased attention to the risks in the financial sector and the sustainability of growth.

The pick-up in the global economy has contributed to a rise in oil and other commodity prices over recent months. Even so, Australia's terms of trade are expected to decline over the next couple of years, but remain at a relatively high level.

Globally, inflation remains low, although higher commodity prices and tight labour markets are likely to see inflation increase over the next couple of years. Long-term bond yields have risen but are still low. As conditions have improved in the global economy, a number of central banks have withdrawn some monetary stimulus. Financial conditions remain expansionary, with credit spreads narrow.

The Bank's central forecast for the Australian economy is for GDP growth to pick up, to average a bit above 3 per cent over the next couple of years. The data over the summer have been consistent with this outlook. Business conditions are positive and the outlook for non-mining business investment has improved. Increased public infrastructure investment is also supporting the economy. One continuing source of uncertainty is the outlook for household consumption. Household incomes are growing slowly and debt levels are high.

Employment grew strongly over 2017 and the unemployment rate declined. Employment has been rising in all states and has been accompanied by a significant rise in labour force participation. The various forward-looking indicators continue to point to solid growth in employment over the period ahead, with a further gradual reduction in the unemployment rate expected. Notwithstanding the improving labour market, 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. There are reports that some employers are finding it more difficult to hire workers with the necessary skills.

Inflation is low, with both CPI and underlying inflation running a little below 2 per cent. Inflation is likely to remain low for some time, reflecting low growth in labour costs and strong competition in retailing. A gradual pick-up in inflation is, however, expected as the economy strengthens. The central forecast is for CPI inflation to be a bit above 2 per cent in 2018.

On a trade-weighted basis, the Australian dollar remains within the range that it has been in over the past two years. An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.

Nationwide measures of housing prices are little changed over the past six months, with prices having recorded falls in some areas. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. To address the medium-term risks associated with high and rising household indebtedness, APRA introduced a number of supervisory measures. Tighter credit standards have also been helpful in containing the build-up of risk in household balance sheets.

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. Taking account of the available information, the Board judged 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."


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