Reserve Bank to track jobs closely as it holds rates ahead of election

The central bank has opted to keep rates on hold as it welcomed “some pick-up in wages growth”.

Reserve Bank Governor Philip Lowe. Picture: AAP

The Reserve Bank of Australia has left interest rates unchanged at its monthly board meeting but appeared more watchful of the economy saying lower unemployment was needed to lift inflation toward its 2-3 per cent target.

Despite significant expectations of a cut, the RBA has kept the cash rate at a record low 1.5 per cent for a 33rd consecutive month.

The Australian dollar spiked on the news, rising from around US69.95 cents ahead of the announcement to US70.38c at 3.10pm (AEST). The local bourse however slumped, with the ASX200 slicing earlier strong gains to be up just 0.22 per cent at 6293.2.

“A further improvement in the labor market was likely to be needed for inflation to be consistent with the target. Given this assessment, the Board will be paying close attention to developments in the labor market at its upcoming meetings,” RBA Governor Philip Lowe said in a statement.

The central bank Governor said the board welcomed the “pick-up in wages growth” and noted a “further lift in wages growth is expected, although this is likely to be a gradual process.”

The outlook for interest-rates now rests fully on the pace of job creation in the economy, with any rise in the jobless rate from its current level of 5.0 per cent set to bring an interest rate cut closer.

The decision to keep interest-rates on hold has also steered the RBA clear of any political entanglements, with the federal election due on May 18.

Mr Lowe said the RBA expects the economy to grow at its long-term average rate of 2.75 per cent this year and the next, with core inflation set to remain under the 2-3 per cent target this year before nudging higher in 2020.

The decision to extend Australia’s longest period of steady monetary policy came despite significantly below-target inflation, a sharp slowdown in domestic and global economic growth since mid-2018 — worsened by US-China trade tensions that have flared up again this week — and Australia’s biggest housing market correction since the early 1980s.

It comes ahead of an update to the central bank’s economic forecasts in the RBA’s Statement on Monetary Policy due out this Friday.

Economic data out earlier today showed retail sales ex-inflation fell 0.1 per cent in the March quarter, the weakest since 2012.

However, retail sales for March were slightly stronger than expected and the international trade balance also beat expectations.

Fifteen of 29 economists surveyed by Bloomberg had predicted the RBA would cut rates this month after surprisingly low inflation data for the March quarter raised doubts the central bank could credibly predict that inflation will return to its 2-3 per cent target zone.

Combined with the risks posed to economic growth from a sharp downturn in business confidence, weak consumer demand, slowing credit growth, the lack of inflation in the Australian economy and the cessation of hawkish rhetoric from the central bank in recent months, the consensus view among economists shifted from rate hikes in 2020 to the current expectation of two interest rate cuts by August this year.

The market-implied chance of a 25 basis point cut in the cash rate at this month’s meeting was about 50 per cent.

Two cuts in the cash rate to a record-low 1 per cent cash rate was priced in as a certainty by year end.

The RBA is widely expected to downgrade its economic forecasts in its Statement on Monetary Policy this Friday, but there have been some encouraging signs in recent months with employment growth remaining strong and unemployment hovering near the estimated non-accelerating inflation rate of 5 per cent after hitting a near-eight-year low of 4.9 per cent in February.

The international trade balance, home loans, consumer confidence and leading indicators have also shown some improvement.

With Dow Jones