RBA keeps interest rates at standstill

For its 16th consecutive month the RBA will keep interest rates at 1.5% as predicted by the majority of economists.

Reserve Bank Australia
Sydney/Australia - 20/10/2016: Business people pass by the Reserve Bank of Australia. It's the Australian central bank and banknote issuing authority since 1960 when it replaced the Commonwealth Bank functions. Photo: Lucid Waters, Bigstock

Meeting the expectations of economists, the RBA (Reserve Bank of Australia) has kept interest rates at a steady 1.5% for its 16th month in a row.

At the RBA’s December policy meeting it was decided that the cash rate target would remain at 1.5% which has been predicted by economists. RBA officials insist that while the CPI (consumer price index) and inflation are running below 2% the prediction for future inflation will increase as the Australian economy begins to strengthen.

The RBA predicts that employment growth in 2018 will follow the gradual trend that has been continuing throughout 2017. The low rate of wage growth is not expected increase anytime soon but is likely to grow with the changing labour market.

The RBA report pointed out that an increasing difficulty for employers to find the right employees will eventually force them to concede higher wages.

Household consumption was cited as another uncertainty factor that was being watched closely. An increasingly regulated housing market without any real improvement in household income was set to keep debts at high levels.

After government regulation of risky lending there has been a drop in interest-only housing loans which has offset the need for a rate-rise to cooldown the volatile housing market.

It is predicted that Australia’s GDP (gross domestic product) will increase at a rate of 3% over the coming years. Following the RBA decision the Australian dollar was performing 0.5% stronger against the US dollar.

Earlier data that was released indicated a growth in retail sales by 0.5% year on year, outperforming expectations by economists. This data has suggested an important rise in consumer spending into the Christmas period.

It seems as though the RBA’s final meeting of 2017 was a relatively short one. The RBA has effectively retained a neutral policy plan and made no big changes to its overall policy statement.

The RBA noted that the low interest rate was of the best benefit to the Australian economy, using available information to support its decision. The 1.5% interest rate is expected to remain consistent with the steady growth of the Australian economy and will gradually achieve its inflation target.

As this reasoning is identical to that provided in last month’s policy statement it strongly indicates that interest rates are still unlikely to be altered into the near future.  Economists believe the cash rate will stay where it is until strong evidence of wage growth and an upwards trend in inflation is discovered.

It is now necessary for other policy arms to facilitate the growth in wages and productivity the economy is demanding.