Reserve Bank leaves interest rates on hold as widely expected

Updated

The Reserve Bank of Australia has left interest rates on hold at an historic low of 1.5 per cent as widely expected and flagged that some "slowing in the year-ended growth rate is likely" before picking up again.

Key points All economists polled expected rates to be kept on hold at 1.5 per cent

Markets are pricing in a 12pc chance the RBA will hike rates in 2017

Some economists expect GDP figures due tomorrow will show the economy contracted for only the fourth time in 25 years

All 64 economists polled by Reuters expected the RBA to keep rates on hold at today's meeting, the last of the year.

In a statement, the RBA said the global economy is continuing to grow, but at a lower-than-average pace.

"Labour market conditions in the advanced economies have improved over the past year," the statement by governor Philip Lowe said.

"Economic conditions in China have steadied, supported by growth in infrastructure and property construction, although medium-term risks to growth remain."

Those risks include the fact that inflation remains below most central banks' targets, with annual headline inflation in Australia at an anaemic 1.3 per cent, still well below the RBA's 2 to 3 per cent inflation target.

"The continuing subdued growth in labour costs means that inflation is expected to remain low for some time, before returning to more normal levels," Dr Lowe wrote.

The statement also pointed to variation in employment across the country, with part-time jobs growing strongly, while employment growth overall has slowed, and said forward looking indicators point to an expansion in employment in the near term.

Markets are currently pricing in a 12 per cent chance the RBA will hike rates in 2017.

"In Australia, the economy is continuing its transition following the mining investment boom," Dr Lowe said, adding that increases in resources exports are expected as projects are completed.

"The outlook for business investment remains subdued, although measures of business sentiment remain above average."

The Reserve Bank again pointed to low interest rates supporting domestic demand while lower exchange rates since 2013 have helped the traded sector, but again flagged an appreciating Australian dollar could "complicate this".

Dr Lowe said conditions in the housing market have strengthened overall, but still vary considerably around the country.

"Housing credit has picked up a little, although turnover of established dwellings is lower than it was a year ago," he wrote.

"Supervisory measures have strengthened lending standards and some lenders are taking a more cautious attitude to lending in certain segments."

Eyes on GDP

GDP figures from the Bureau of Statistics are due tomorrow with some economists anticipating that the numbers will show the Australian economy contracted for only the fourth time in the last 25 years.

Account deficit data today showed in volume terms, imports outpaced exports and the ABS said that would shave 0.2 percentage points off tomorrow's GDP number.

Economists said small declines in the economy can happen with adverse influences, and the September quarter was likely influenced by Brexit, the federal election and uncertainty about the US election.

"If the economy did go backwards, it will serve as a wake up call for Australia's politicians," said Craig James, economist at CommSec in a note to clients.

"The message from consumers and businesses is that the major parties need to flesh-out reforms, especially on taxation, that will give Australians confidence to spend, invest and employ.

"But the Reserve Bank will not be fazed — the outlook is still positive with the economy likely to gain momentum over the coming year."

Topics: business-economics-and-finance, economic-trends, money-and-monetary-policy, markets, australia

First posted