Reserve Bank Board a little more upbeat on the labour market: Bill Evans
EXPERT OBSERVER
As expected, the Board of the Reserve Bank decided to leave the cash rate unchanged at 1.50%.
There were very few changes in the Governor’s statement from the statement on August 7.
The Governor confirmed the central growth forecast for GDP growth to average “a bit above 3 per cent” in 2018 and 2019. Positive business conditions were noted but once again, “one continuing source of uncertainty is the outlook for household consumption”.
The rhetoric around the labour market was a little more upbeat. The unemployment rate at 5.3% was described as “the lowest level in almost six years”. Reports of skill shortages were noted and while wages growth was described as quite low, “it has picked up a little recently”. However despite that more positive assessment, the forecast for the unemployment rate remains unchanged to settle at 5 per cent “over the next couple of years”.
Since the last Board meeting, the Australian dollar had fallen from around USD 74.40 to USD 71.90. Furthermore, the Trade Weighted Index (TWI) had fallen from 63.5 to 61.8 (down 2.6%). This unusually large move prompted extra commentary on the AUD. It is still described as remaining within the two year range, but “it has depreciated against the USD along with most other currencies”. The move against the USD is around 3.3% compared to 2.6% for the TWI. It is a little surprising that the commentary seems to attribute all the weakness in the AUD to USD strength.
Since the August Board meeting, Westpac has increased its standard variable mortgage rate by fourteen basis points. It is interesting that the Governor continues to describe rates as “some lenders have increased mortgage rates by small amounts”.
The commentary around the housing market is unchanged with Sydney and Melbourne markets continuing to ease and housing credit growth declining to an annual rate of 5 ½ per cent.
The closing paragraph in the Governor’s statement is unchanged with the key commentary “further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual”.
Conclusion
Since the last Board meeting, Westpac extended its public forecasts to 2020. We expect the RBA to keep the cash rate on hold over the extended period. It is our view that the global economy, where growth appears to have peaked in 2017, will be slowing through 2020, particularly as the US economy slows under the weight of further rate increases from the Federal Reserve and a curtailment of the fiscal stimulus..
The normal RBA policy of raising the cash rate at a time of strong global growth has been replaced in this cycle with other ways to tighten financial conditions. These have included macroprudential policies around banks’ mortgage books, and the rise in wholesale funding costs which has impacted the borrowing costs of banks, corporates, and in some cases, households.
BILL EVANS is chief economist of Westpac.
