Interest Rates Australia

Minutes of the Monetary Policy Meeting of the Reserve Bank Board

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Considerations for Monetary Policy

In considering the stance of monetary policy, members noted that the data received over the prior month confirmed that global economic conditions had strengthened since 2016. Labour markets had continued to tighten and above-trend growth was expected in a number of advanced economies. Growth in wages and inflation had generally remained subdued and core inflation had eased a little. In China, continued strong growth in infrastructure investment had supported demand for commodities, although medium-term risks associated with high and rising debt levels remained.

Conditions in global financial markets had generally remained very accommodative; long-term bond yields in the major financial markets had declined and volatility had been low. No further monetary easing was expected in the major economies and the US Federal Reserve was expected to raise the federal funds rate further in the period ahead.

Members noted that the Australian economy had grown at a below-trend rate over 2016/17. The data on domestic activity received over the prior month had, on balance, been positive and consistent with a gradual pick-up in growth as forecast. Members noted that conditions had been conducive to a pick-up in non-mining investment for some time and the latest data on investment expectations pointed to this occurring, which was a welcome development. The decline in mining investment was diminishing and strength in public infrastructure investment was expected. Residential investment appeared to have passed its peak, but was expected to remain at a high level for some time.

Employment growth had been broadly based across the states, suggesting that the adjustment to the end of the mining investment boom was nearing completion. Solid growth in employment was expected to continue, which would support household incomes and thus spending in the period ahead. Members acknowledged the risks to this scenario from growth in housing debt having outpaced the slow growth in household incomes over the preceding few years. Growth in wages and inflation had remained low but stable. This was expected to remain the case for some time. Nevertheless, a gradual increase in growth in wages and inflation was expected as the spare capacity in the labour market was reduced and the economy continued to strengthen, supported by the low level of interest rates.

The appreciation of the Australian dollar over recent months, driven in part by a broad depreciation of the US dollar, was weighing on domestic growth and contributing to subdued inflationary pressure. A further appreciation of the Australian dollar would be expected to result in a slower pick-up in growth and inflation.

Members noted that conditions in established housing markets had continued to vary considerably. There had been clearer signs of an easing in conditions in the Sydney market but less so in Melbourne, where prices had continued to grow strongly. Borrowing for housing had continued to outpace growth in incomes, although the composition had shifted towards owner-occupiers, with higher interest rates for investors in housing reflecting the ongoing effects of APRA’s recent measures to strengthen lending standards in this area.

Taking into account all of the available information, and the need to balance the risks associated with high household debt in a low-inflation environment, the Board judged that holding the stance of monetary policy unchanged would be consistent with sustainable growth in the economy and achieving the inflation target over time.

The Decision

The Board decided to leave the cash rate unchanged at 1.5 per cent.

(Source: Reserve Bank of Australia)