Originally published by AMP Capital
As widely expected the RBA left rates on hold at 1.5%. This is the 19 month in a row of rates on hold and equals the previous record of 19 months set in 1995-96.
On the one hand the global economy looks good, business conditions are strong, non-mining business investment and infrastructure spending are increasing, further export growth is expected, jobs growth is strong and the RBA still expects to see stronger economic growth and inflation.
But on the other hand uncertainty around consumer spending remains high (as highlighted by today’s retail sales data showing growth of just 2.1% over the 12 months to January), wages growth remains low, inflation remains low, the Australian dollar is arguably too high and the RBA seems a little bit less upbeat on growth than it did a month ago. All of this supports the case to leave rates on hold and with the RBA still expecting progress in reducing unemployment and getting inflation back to target “likely to be gradual” its likely to remain on hold for some time to come. Particularly with the cooling Sydney and Melbourne property markets providing it with more flexibility on rates. We have been expecting a rate hike later this year, but the risks are increasing that the RBA won’t start raising rates until sometime in 2019.
But shouldn’t the RBA be following the Fed higher in rates? The short answer is no. There is no automatic link between what the Fed does and the RBA. Right now Australia has far more spare capacity than the US - with eg unemployment plus underemployment running around 8% in the US and near 14% in Australia - and therefore there is far less pressure for wages growth to rise in Australia than in the US. While a falling interest rate gap versus the US – with Australian rates likely to fall below US rates later this month when the Fed hikes again - normally results in a lower Australian dollar (see the chart below), the RBA would welcome this.
