Recession Australia
Statement by Philip Lowe, Governor:
Monetary Policy Decision
At its
meeting today, the Board decided to leave the cash rate unchanged at
1.50 per cent.
Conditions
in the global economy are continuing to improve. Labour markets have tightened
further and above-trend growth is expected in a number of advanced economies,
although uncertainties remain. Growth in the Chinese economy has picked up a
little and is being supported by increased spending on infrastructure and
property construction, with the high level of debt continuing to present a
medium-term risk. Commodity prices have generally risen recently, although
Australia's terms of trade are still expected to decline over the period ahead.
Wage growth
remains subdued in most countries, as does core inflation. Headline inflation
rates have declined recently, largely reflecting the earlier decline in oil
prices. In the United States, the Federal Reserve expects to increase interest
rates further and there is no longer an expectation of additional monetary
easing in other major economies. Financial markets have been functioning
effectively and volatility remains low.
The Bank's
forecasts for the Australian economy are largely unchanged. Over the next
couple of years, the central forecast is for the economy to grow at an annual
rate of around 3 per cent. The transition to lower levels of mining investment
following the mining investment boom is almost complete, with some large LNG
projects now close to completion. Business conditions have improved and
capacity utilisation has increased. Some pick-up in non-mining business
investment is expected. The current high level of residential construction is
forecast to be maintained for some time, before gradually easing. One source of
uncertainty for the domestic economy is the outlook for consumption. Retail
sales have picked up recently, but slow growth in real wages and high levels of
household debt are likely to constrain growth in spending.
Employment
growth has been stronger over recent months, and has increased in all states.
The various forward-looking indicators point to continued growth in employment
over the period ahead. The unemployment rate is expected to decline a little
over the next couple of years. Against this, however, wage growth remains low
and this is likely to continue for a while yet.
The recent
inflation data were broadly as the Bank expected. Both CPI inflation and
measures of underlying inflation are running at a little under
2 per cent. Inflation is expected to pick up gradually as the economy
strengthens. Higher prices for electricity and tobacco are expected to boost
CPI inflation. A factor working in the other direction is increased competition
from new entrants in the retail industry.
The
Australian dollar has appreciated recently, partly reflecting a lower US
dollar. The higher exchange rate is expected to contribute to subdued price
pressures in the economy. It is also weighing on the outlook for output and
employment. An appreciating exchange rate would be expected to result in a
slower pick-up in economic activity and inflation than currently forecast.
Conditions
in the housing market vary considerably around the country. Housing prices have
been rising briskly in some markets, although there are some signs that these
conditions are starting to ease. In some other markets, prices are declining.
In the eastern capital cities, a considerable additional supply of apartments
is scheduled to come on stream over the next couple of years. Rent increases
remain low in most cities. Investors in residential property are facing higher
interest rates. There has also been some tightening of credit conditions
following recent supervisory measures to address the risks associated with high
and rising levels of household indebtedness. Growth in housing debt has been
outpacing the slow growth in household incomes.
The low
level of interest rates is continuing to support the Australian economy. 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.
(Source:
Reserve Bank of Australia)
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