The RBA has left rates on hold at 1.5% again at its March meeting, equalling the previous record of 19 months in a row, set in 1995-96. What was more surprising however, was that the RBA seemed less upbeat on growth than it was just a month ago.
Don’t hold your breath for an official rate rise – if you happened to be hoping for one – because it looks likely the Reserve Bank of Australia may now hold off until next year.
The RBA left rates on hold at 1.5 per cent at its March meeting. This is the 19-month in a row of rates on hold and equals the previous record of 19 months set in 1995-96.
We expected rates to remain on hold this time around. What was more surprising, was the indication that the RBA is less upbeat on growth than it was just a month ago.
After all, Australian business conditions are good, non-mining business investment and infrastructure spending are increasing, further export growth is expected, jobs growth is strong, and the RBA still expects to see stronger economic growth and inflation.
Further to this, the global economy looks positive, and despite the recent stock-market volatility driven by the US, we still expect the Federal Reserve Bank to raise rates four times and possibly five times this year, after hiking them three times in 2017.
There is a widely-held view that the RBA follows the Fed in raising rates, but this is not always the case. There is no automatic link between what the Fed does and the RBA, and right now, Australia has far more spare capacity than the US.
Unemployment plus underemployment is running around 8 per cent in the US and compared with 14 per cent in Australia - and therefore there is far less pressure for wages growth to rise in Australia than in the US.
While a falling interest rate gap versus the US – with Australian rates likely to fall below US rates later this month when the Fed hikes again - normally results in a lower $A (see the chart below), the RBA would welcome this.
And while Australian employment figures are improving, wages growth remains subdued and this is impacting on consumer spending. Retail sales data released this month showed growth of just 2.1 per cent over the 12 months to January.
The RBA is still expecting progress in reducing unemployment, and getting inflation back to target is “likely to be gradual.”
Plus, the great pressure it faced to raise rates and cool the overheated house market has now gone. The Sydney and Melbourne property markets have both eased without the need for a rate hike.
The bottom line is that we’ve been expecting a rate hike later this year, but now have the view that the RBA won’t start raising rates until sometime in 2019.
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