Rates stay at record low

RBA cites slow wage growth and weak inflation

WEAK inflation, sluggish wage growth and high levels of household debt prompted the central bank to keep interest rates on hold at a record low yesterday.

The Reserve Bank of Australia slashed the cash rate from November 2011 to August 2016 to 1.5 per cent to boost the economy as it transitioned away from a mining investment boom and it has not moved since.

Most economists are not expecting the bank to lift rates until late next year, or even 2020, given household debt and slow wages growth continue to affect consumer spending.

And with one of the big four lenders – Westpac – pushing up its mortgage borrowing costs out of cycle since the central bank last met in August, the chances of an official rate hike appear to have receded even further.

Other major banks are widely expected to follow Westpac’s move.

“While the rise in mortgage rates on average is small at about 15 basis points, it’s still another dampener on consumer spending and homebuyer demand,” said AMP Capital chief economist Shane Oliver.

“It will hit the homebuyer market, particularly in Sydney and Melbourne, at a time when it’s already down.

“As such it’s a de facto monetary tightening and is yet another reason for the RBA to remain on hold for longer.”

The RBA continues to put its faith in lower unemployment helping to boost wage growth and eventually lift inflationary pressures in the economy.

Unemployment across the nation is currently at 5.3 per cent, the lowest level in almost six years.

“A further gradual decline in the unemployment rate is expected over the next couple of years to around 5 per cent,” said Reserve Bank governor Philip Lowe (pictured). “Wages growth remains low, although it has picked up a little recently. The improvement in the economy should see some further lift in wages growth over time, although this is likely to be a gradual process.”

Inflation sits around 2 per cent, with the bank having a target of 2-3 per cent.

“The central forecast is for inflation to be higher in 2019 and 2020 than it is currently,” said Mr Lowe.

“Taking account of the available information, the board judged that 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.”