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The Reserve Bank seems unlikely to cut the cash rate thanks to benefits from the lower Australian dollar flowing through to the economy.
In the minutes of its November board meeting, the central bank gave an upbeat assessment on the Australian economy but also said very weak inflation gave it scope for a rate cut if need be.
During the November 3 meeting, the RBA board decided to keep the cash rate on hold at 2.0 per cent, partly because economic conditions had firmed, aided by weaker dollar.
“Support provided to the economy following the depreciation of the exchange rate was particularly apparent in the sizeable contribution to growth from net service exports over the year to date,” the RBA said.
Looking ahead, board members believed the services sector would continue to boost growth in output.
They also noted that inflation remained below target, highlighting the lower-than-expected inflation print in the September quarter.
Consumer prices rose 0.5 per cent in the September quarter for an annual rate of 1.5 per cent, and has now been below the RBA’s two to three per cent target band for a year.
“Inflation was forecast to be consistent with the target over the next one to two years, but somewhat lower than earlier expected,” the bank said.
The RBA has since trimmed inflation forecasts, while being more positive on jobs growth and the housing market.
The minutes noted employment growth, concentrated in the household and business services sectors, had been stronger than expected this year.
“Measures of job vacancies and advertisements pointed to continued growth in employment in the months ahead,” the bank said.
The central bank acknowledged household consumption is tipped to add significantly to growth in the next two years thanks to relatively strong employment and low interest rates.
But board members warned the unemployment rate was still high and wages growth was sluggish.
“The gradual nature of the pick-up in domestic growth suggested that spare capacity would persist for some time,” the RBA said.
The meeting was held two weeks ago, before a surprise drop in the jobless rate all but guaranteed interest rates to remain steady ahead of Christmas.
Australia’s unemployment rate fell to 5.9 per cent in October, while the total number of people with jobs surged by 58,600.
The RBA said tighter regulations were helping to contain the housing market, and removing any obstacles to cutting rates if necessary.
“While the recent changes to some lending rates for housing would reduce the support to demand from low interest rates slightly, overall conditions were still accommodative,” the RBA said.
“Forward-looking indicators of housing activity generally pointed to further growth in dwelling investment, albeit at a moderating rate.”
Article source: https://au.finance.yahoo.com/news/rba-confidence-economy-grows-015822505.html
