RBA Left Cash Rate Unchanged for 25 Months in a Row

RBA left the cash rate unchanged at 1.5% for a 25th consecutive month. Similar to previous meetings, policymakers were upbeat over the growth and the employment outlook, while acknowledging soft wage growth and inflation. In short, the central bank is optimistic over the business conditions and higher levels of investment in public infrastructure. It acknowledged the strong growth in employment, projecting the unemployment rate to drop to around 5% over the next couple of years. The members, however, judged that low inflation and soft wage growth worth ongoing monitor before another rate hike. The policy statement was almost identical to the previous one, with only some changes seen in the assessments of the job market and exchange rate.

Policymakers were more upbeat over the employment situation. As suggested in the statement, “the unemployment rate has fallen to 5.3%, the lowest level in almost six years. The vacancy rate is high and there are reports of skills shortages in some areas”. Meanwhile, the members acknowledged that “wages growth remains low, although it has picked up a little recently”. They expected that growth would be above trend in 1H18 but maintained the growth forecast unchanged. The central bank affirmed that the central growth forecast for GDP growth to average “a bit above 3 per cent” in 2018 and 2019. While noting positive business conditions, it reiterated concerns over domestic demand, suggesting that “one continuing source of uncertainty is the outlook for household consumption”.

AUDUSD has declined more than -3% since the August meeting. RBA attributed this to the strength of US dollar. As noted in the statement, RBA reiterated last meeting’s rhetoric that Aussie “remains within the range that it has been in over the past two years on a trade-weighted basis”. Yet, it added that the depreciation is mainly “against the US dollar along with most other currencies”.

Given soft inflation, RBA would wait for significant increase in inflation before signalling a rate hike. The market currently expects it would keep the powder dry until 2020.