Reserve Bank keeps cash rate at 1.5pc

Reserve Bank governor Philip Lowe delivered an upbeat assessment of the Australian economy yesterday.

Dollar

Reserve Bank governor Philip Lowe delivered an upbeat assessment of the economy yesterday, brushing aside fears of a recession and snuffing out any chance of an interest-rate cut — for the next few months at least.

In its first meeting of the year, the nine-member RBA board, as expected, kept the cash rate at 1.5 per cent. But the governor’s optimistic tone pushed the dollar higher towards US77c.

Dr Lowe emphasised the improving global outlook and rising bond yields, underscoring the central bank’s expectation that the economy would continue to expand by 3 per cent in coming years. Housing prices were “rising briskly”, but growth in rents remained the “slowest for a couple of decades”.

“Business and consumer confidence have both picked up,” he said. “The improvement in the global economy has contributed to higher commodity prices, which are providing a boost to Australia’s national income.”

Australia registered its biggest ever monthly trade surplus in ­December, bolstered by surging prices of iron ore and coal.

Investors are now pricing in a greater chance of a rate rise this year, with the prospect of a November lift seen at 20 per cent, as against 16 per cent just before the meeting. The chances of a November cut, in contrast, have been trimmed from 13 per cent to 11 per cent. “Taking account of the available information, and having eased monetary policy in 2016, the board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time,” Dr Lowe said, echoing his previous December statement.

A formal update on forecasts will be provided in Friday’s Statement on Monetary Policy, but Dr Lowe noted that a soft inflation reading last week had not negatively affected its outlook.

“Headline inflation is expected to pick up over the course of 2017 to be above 2 per cent, with the rise in underlying inflation ­expected to be a bit more gradual,” Dr Lowe said. “GDP was weaker than expected in the September quarter, largely reflecting temporary factors. A return to reasonable growth is expected in the December quarter.”

The RBA showed a little more concern about a rising dollar in light of improving commodity ­prices, with the local unit recently hitting a 3½-month high as it approached US77c. “An appreciating exchange rate would complicate this adjustment,” Dr Lowe said.

Economic readings have been mixed in recent months, with modest inflation, weak third-­quarter growth and retail sector blues highlighting concerns. The housing market is still booming, however, and trade data has revealed a strong boost from the recent rise in commodity prices.

Dr Lowe largely retained the commentary on the housing market provided in December, although the RBA has noted the recent rapid rise in investor lending after a regulation-led malaise early last year.

“In China, growth was stronger over the second half of 2016, ­supported by higher spending on infrastructure and property construction,” Dr Lowe said.

“This composition of growth and the rapid increase in borrowing mean that the medium-term risks to Chinese growth remain.”