Rate rise still some way off: RBA

RBA signals that interest rates will remain at record lows for a while yet, even as other central banks dial back stimulus.

Governor of the Reserve Bank, Philip Lowe, says catalysts for a rate increase remain some way off. Pic: AAP

The Reserve Bank of Australia signalled that interest rates will remain at record lows for a while yet, even as other central banks dial back stimulus that has underpinned the global economy for a decade.

The tone of the RBA’s minutes of its June 5 meeting was not unexpected, given Governor Philip Lowe last week said potential catalysts for an interest rate rise — higher wages and a return of inflation to around the midpoint of the RBA’s 2-3 per cent target band — were still some way off.

Interest rates in Australia have been held at a record low 1.5 per cent since mid-2016, helping to support an economy that is on the world’s largest ongoing expansionary streak.

However, policymakers are facing more challenges as house prices fall following a lengthy boom, wages remain slack, and a judicial probe into the conduct of Australia’s biggest banks fuels talk of tighter lending standards and even a credit crunch.

Australia’s decision to stand pat on rates in June is in contrast to the Federal Reserve, which last week voted to lift its benchmark rate for the seventh time since December 2015, to a range between 1.75 per cent and 2 per cent, and pencilled in two more rises this year to keep the economy on an even keel.

These sharply different approaches are creating a headache for Australia’s banks by driving up their higher wholesale borrowing costs. Should the banks seek to pass on these costs to customers, such as by raising variable rates on home loans, then that would also turn down pressure on the RBA to raise rates any time soon.

The RBA’s minutes signalled the possibility that lending standards might become tighter in the near future, but said moves already taken by the banking regulator had been helpful in containing the build-up of risk on household balance sheets. Still, it noted that household debt levels remain high.

Australia’s economy grew strongly in the first three months of 2018 as exports emerged from a brief slump, company profits lifted and a wave of government infrastructure spending continued to build.

Gross domestic product grew 1.0 per cent in the first quarter, and 3.1 per cent from a year earlier. The economy grew an upwardly revised 0.5 per cent on-quarter in the fourth quarter of 2017.

The consensus among economists is that the RBA will defer raising interest rates until mid-2019 as the economy slowly works to erode slack in the job market, and the unemployment rate nudges lower over time.

While unemployment rate fell to a 6-month low in May, the improvement masked some troubling trends with full-time employment falling sharply and the underemployment rate — a measure of people who would like more hours — increasing.

Dow Jones Newswires