Chief economist update: Steady at 24 and counting

The Reserve Bank of Australia (RBA) didn't disappoint when it kept the official cash rate unchanged at a record low 1.5% following its 3 July board meeting.

It has been 24 months now - the longest in recent history - that the official cash rate has remained stuck at 1.5%. It was last lowered from 1.75% in August 2016 and given current market expectations, several more months would be added to this record before the RBA moves.

While the Australian central bank still sees continued expansion in the global economy, it has shifted the risk to global growth from the withdrawal of some monetary stimulus by a number of central ("and further steps in this direction are expected") to "the direction of international trade policy in the US" and "strains in a few emerging market economies, largely for country-specific reasons."

But its prognosis for Australia's domestic economy is still as it was when it met on June 5 and May 1...

"The recent data on the Australian economy continue to be consistent with the bank's central forecast for GDP growth to average a bit above 3% in 2018 and 2019...One continuing source of uncertainty is the outlook for household consumption. Household income has been growing slowly and debt levels are high.

"The outlook for the labour market remains positive. Strong growth in employment has been accompanied by a significant rise in labour force participation. The vacancy rate is high and other forward-looking indicators continue to point to solid growth in employment" but "wages remain low" and is "likely to continue for a while yet, although the stronger economy should see some lift in wages growth over time.

"Inflation is low and is likely to remain so 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% in 2018."

"Nationwide measures of housing prices are little changed over the past six months. Conditions in the Sydney and Melbourne housing markets have eased, with prices declining in both markets. Housing credit growth has declined, with investor demand having slowed noticeably."  The RBA expects some further tightening in lending standards.

Not surprising, these unchanged assessments led to the now familiar conclusion:

"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."

To paraphrase "Newton's First Law of Motion", interest rates at rest will remain at rest unless an outside force acts on it - that outside force could be up or down.

Ben Ong is the Director of Economics and Investments at Rainmaker Group. He previously worked as a fund manager, economist, asset allocation strategist, portfolio analyst and stock market analyst. Check out his economics analysis here.

Read more: HouseholdCPIFirst Law of MotionJuly BoardMelbourneNewtonReserve Bank of AustraliaSydneyUnited States
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