Mortgage holders to breathe easy
ECONOMIC GROWTH TIPPED TO GATHER SPEED BUT NO RATE RISE ON HORIZON
Interest rates are likely to stay unchanged throughout next year, with the Reserve Bank predicting that inflation will remain below the bottom of its 2 to 3 per cent target band until early 2019.
The bank’s quarterly review of the economic outlook shows it is expecting a big improvement in Australia’s economic growth, forecasting that it will lift from a subdued rate of only 2.25 per cent this year to an average 3 per cent next year, lifting further to 3.25 per cent by mid-2019. The better growth will bring a gradual fall in the unemployment rate, but it will not be fast enough to generate higher wages or inflation.
“GDP growth should strengthen over the rest of the forecast period as the drag from mining investment comes to an end and public demand and non-mining business investment continue to support growth” the review says.
The Reserve Bank has cut its forecast for inflation to 1.75 per cent for the remainder of this year and next year, reflecting the impact of a recalculation of the inflation figures by the Australian Bureau of Statistics to allow for changing consumption patterns.
Although this was a technical change, market analysts said it was unlikely that the Reserve Bank would lift interest rates unless inflation had at least reached the bottom of its target band.
Westpac chief economist Bill Evans said that while governor Philip Lowe would continue to indicate that the next move in rates would be an increase, he believed “the rhetoric around a long period of steady rates will gain further emphasis”.
The Reserve Bank’s major concern over the economic outlook is household spending. Its central view is that consumption will improve gradually while remaining below the growth rates seen before the financial crisis.
The Reserve Bank says more firms have been reporting difficulty in finding suitable labour and that might lead to a faster improvement in wage growth. However, it noted that weak wage growth was a global problem, related to factors such as technological change and globalisation which were unlikely to change soon.
Household consumption is also constrained by the level of debt. “A highly indebted household sector is likely to be more sensitive to changes in income or wealth, which could have implications for consumption growth.”
The Reserve Bank is more confident about the outlook for business investment, which it says is “more positive than it has been for some time”.
Recent revisions to national accounts show non-mining business investment is rising more strongly than previously thought and is now 10 per cent higher than at the beginning of last year. It says the growth in investment is supported both by low interest rates and the predicted lift in GDP growth.
The Reserve Bank also expects further improvement in employment. It takes some credit for the strength of the labour market over the past year, saying the stimulatory level of interest rates had “helped generate a decline in unemployment”, which has come down from 5.9 per cent to 5.5 per cent over this year.
The Reserve Bank predicts a gradual further improvement in unemployment to 5.25 per cent by the end of next year.
Australia’s central bank has signalled that interest rates could remain lower for longer, as it balances low inflation, weak retail spending and a debt binge caused by the housing boom it fostered by cutting rates to a record low as mining investment plunged after a decade-long boom.
The Reserve Bank’s quarterly Statement on Monetary Policy yesterday predicted core inflation would stay below the central bank’s 2-3 per cent target next year and would not exceed the bottom of the range in 2019.
While central banks around the world have kicked off a round of interest rate increases, the RBA has held steady on its monetary policy settings for the past 14 months, although Australia did not cut official rates as deep during the downturn that followed the global financial crisis.
In August, the RBA said core inflation would reach a mid-point of 2 per cent in 2017 and 2.5 per cent by mid-2019, fuelling speculation that a round of interest rate rises could begin in late 2018.
Economic growth is still expected to reach an “above-potential” rate of 3.25 per cent next year and unemployment is expected to stay at 5.5 per cent before falling to 5.25 per cent in late 2019, the RBA said in its outlook yesterday.
The dollar reacted negatively but stayed above its recent low of US76.25c as traders continued to see a good chance of an official rate rise late next year.
But Westpac chief economist Bill Evans said the lower inflation forecasts from the RBA had “significant policy implications”, reinforcing his expectation that rates will not rise for two years.
“We are now assessing a central bank that is expecting it will undershoot its headline inflation target for another year, and that even one year out, inflation will still be at the bottom of the target zone,” Mr Evans said.
“It has long been our view that with the confident growth forecasts of 0.5 per cent above potential growth in 2018 and 0.75 per cent above potential in 2019, and inflation moving back to the middle of the target zone in 2019, that the bank expected to be raising rates in 2018. These forecasts no longer portray a central bank that expects to raise rates.”
The RBA has kept the official cash rate at a record low of 1.5 per cent since August last year.
UBS economist George Tharenou said a reweighting of the consumer price index to reflect
changing spending patterns subtracted more from the inflation forecasts than expected, but the slashing of the 2019 forecast for core inflation by 0.5 per cent was a “dovish signal”
“You can also forget about near-term rate hikes,” Mr Tharenou said. Still, he continued to predict that the RBA would be in a position to lift rates by the end of next year.
With early signs of a cooling housing market, this has eased pressure for an increase.
The RBA noted that housing credit growth “has eased a little”, helped by restrictions on bank lending while the profile of new lending has shifted away from interest-only and other high-risk loans. However, it noted a potential stress point in the economy of high household debt that “continues to increase faster than household income”.
In its statement yesterday, the RBA said the economy was expected to “expand at a solid pace” over the next couple of years, and labour market developments had been “quite positive of late”.
“The drag on growth from the end of the mining investment boom has eased and is likely to end some time in the next year or so,” the RBA said. “Investment in the non-mining sector has been increasing but growth in consumption has been below average. Inflation and wage growth remain low. Both are expected to rise only gradually.”
The RBA added that growth in household consumption looks to have slowed in the September quarter given recent weakness in retail spending. Consumption growth is expected to pick up gradually, but slow growth in incomes and high levels of debt are constraining factors, it said.
Slow growth in household income has been driven primarily by unusually soft outcomes for average employee earnings as measured in the national accounts, which has more than offset the effects of strong employment growth. Wage growth has stayed near record lows near 2 per cent in recent quarters.