Interest rates on hold again as RBA defies global trend

The Reserve Bank remains firmly on the sidelines of the global trend toward higher interest rates.

Governor of the Reserve Bank of Australia, Philip Lowe. Picture: AAP

The Reserve Bank remains firmly on the sidelines of the global trend toward higher interest rates, singling out the prospect of a damaging global trade war in its latest interest rate decision.

The Reserve Bank board left the official interest rate unchanged at 1.5 per cent for the 23rd month in a row yesterday, staring down calls from some quarters to follow the US in returning official rates to higher levels while the economy is growing strongly.

“One uncertainty regarding the global outlook stems from the direction of international trade policy in the United States. There have also been strains in a few emerging market economies, largely for country-specific reasons,” RBA governor Philip Lowe said in his statement accompanying the decision yesterday.

The Australian dollar dropped to about US73.2c on the announcement, almost setting a new 2018 low against the US dollar, but bounced back in afternoon trade.

“The Australian dollar has depreciated a little, but remains within the range that it has been in over the past two years,” Dr Lowe said.

Fears an emerging trade spat between the US and China could derail a global economic recovery, and signs house prices are falling in Sydney and Melbourne, have sapped some of the optimism that characterised last month’s statement.

“The governor’s statement was a little less positive on the global front, and acknowledged uncertainty around the rise in Australia’s short-term wholesale interest rates, but retained the core view of growth averaging a bit above 3 per cent a year and an eventual lift in inflation,” Westpac economist Matthew Hassan said.

business graph: aus dollar price

Other economists stressed the similarity to last month’s statement. “The best that was on offer, in terms of excitement, was a modest reshuffle of some of the text in the post-board meeting statement,” said HSBC chief executive Paul Bloxham. “The run of local numbers has generally been a bit more positive than expected, although the global developments, particularly on trade policy, have been a bit grimmer.”

The RBA remains confident wage growth will pick up and inflation will return to the middle of the 2-3 per cent target. “The rate of wages growth appears to have troughed and there are increasing reports of skills shortages in some areas,” the statement said. The unemployment rate fell to 5.4 per cent from 5.6 per cent in May.

“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,” Dr Lowe said. “Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual,” he added.

Pricing in financial markets imply a long period of unchanged official interest rates, with prices in bond markets yesterday suggesting a 20 per cent probability of rate increase by April next year.

With the cash rate unchanged since it was cut by 0.25 percentage points to 1.5 per cent in August 2016, the central bank hasn’t adjusted interest rates for 23 months, or 21 consecutive meetings — the longest stretch of stable monetary policy in Australia since the Reserve Bank started announcing its policy adjustments in 1990.

The governor’s warning on trade tensions echoed concerns from the Bank for International Settlements, which co-ordinates international central bank communication, in its annual report. Growing protectionist measures “would negatively affect business confidence and investment”, it said. “Were this seen as threatening the current multilateral trading system, the impact could be very significant.”

Separately, the Australian Bureau of Statistics said home approvals fell 3.2 per cent in May, more than economists had expected and the second consecutive monthly decline. “Weakness in private housing approvals was well distributed across the major states, though particularly notable in Queensland, which registered a 20 per cent fall,” a JPMorgan analyst said.