At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.
The global economic expansion is continuing. A number of advanced economies are growing
at an above-trend rate and unemployment rates are low. Growth in China has slowed a
little, with the authorities easing policy while continuing to pay close attention to
the risks in the financial sector. Globally, inflation remains low, although it has
increased due to both higher oil prices and some lift in wages growth. A further pick-up
in inflation is expected given the tight labour markets and, in the United States, the
sizeable fiscal stimulus. One ongoing uncertainty regarding the global outlook stems
from the direction of international trade policy in the United States.
Financial conditions in the advanced economies remain expansionary but have tightened
somewhat recently. Equity prices have declined and yields on government bonds in some
economies have increased, although they remain low. There has also been a broad-based
appreciation of the US dollar this year. In Australia, money-market interest rates have
declined recently, after increasing earlier in the year. Standard variable mortgage
rates are a little higher than a few months ago and the rates charged to new borrowers
for housing are generally lower than for outstanding loans.
The Australian economy is performing well. Over the past year, GDP increased by 3.4 per cent
and the unemployment rate declined to 5 per cent, the lowest in six years. The
forecasts for economic growth in 2018 and 2019 have been revised up a little. The
central scenario is for GDP growth to average around 3½ per cent over
these two years, before slowing in 2020 due to slower growth in exports of resources.
Business conditions are positive and non-mining business investment is expected to
increase. Higher levels of public infrastructure investment are also supporting the
economy, as is growth in resource exports. One continuing source of uncertainty is the
outlook for household consumption. Growth in household income remains low, debt levels
are high and some asset prices have declined. The drought has led to difficult
conditions in parts of the farm sector.
Australia’s terms of trade have increased over the past couple of years and have
been stronger than earlier expected. This has helped boost national income. While the
terms of trade are expected to decline over time, they are likely to stay at a
relatively high level. The Australian dollar remains within the range that it has been
in over the past two years on a trade-weighted basis, although it is currently in the
lower part of that range.
The outlook for the labour market remains positive. With the economy growing above
trend, a further reduction in the unemployment rate is expected to around 4¾ per cent
in 2020. The vacancy rate is high and there are reports of skills shortages in some
areas. Wages growth remains low, although it has picked up a little. The improvement in
the economy should see some further lift in wages growth over time, although this is
still expected to be a gradual process.
Inflation remains low and stable. Over the past year, CPI inflation was 1.9 per cent
and, in underlying terms, inflation was 1¾ per cent. These outcomes were
in line with the Bank’s expectations and were influenced by declines in some
administered prices due to changes in government policies. Inflation is expected to pick
up over the next couple of years, with the pick-up likely to be gradual. The central
scenario is for inflation to be 2¼ per cent in 2019 and a bit higher in the
following year.
Conditions in the Sydney and Melbourne housing markets have continued to ease and
nationwide measures of rent inflation remain low. Growth in credit extended to
owner-occupiers has eased but remains robust, while demand by investors has slowed
noticeably as the dynamics of the housing market have changed. Credit conditions are
tighter than they have been for some time, although mortgage rates remain low and there
is strong competition for borrowers of high credit quality.
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.
