RBA sees slow inflation as cash rate stays on hold

Bloomberg

Australia’s central bank used its Statement on Monetary Policy to flesh out its consistent recent view of accelerating growth and sluggish inflation, suggesting interest rates will stay at a record-low 1.5 percent.
Underlying inflation forecasts revised slightly lower for 2018 and cut by half percentage point for 2019, mainly to allow for upcoming reweighting of CPI. “The assessment of pricing pressures in the near term has not changed,” the RBA said. Quarterly GDP growth to ease slightly in third quarter, then to average about 3% over next couple of years, led by resource exports and more positive business investment. Household consumption likely slowed in third quarter after weak retail data; weak income growth and high debt levels are constraints Labor market conditions have “strengthened considerably” and forward indicators suggest “above-average employment growth” will continue.
The Reserve Bank of Australia has set the scene for a pickup in the economy while incorporating caveats seen in developed-world counterparts — where tight labor markets have failed to drive up wages, yet they’re nonetheless starting to remove stimulus. A key concern is how Aussie households cope with record-high debt. Westpac Banking Corp. CEO Brian Hartzer said in an analyst call on Monday: “We don’t see the cash rate moving for some time.” Traders aren’t pricing in a really strong chance of a rate increase until November 2018.
“The experience of economies with tighter labor markets than Australia’s shows how long it can take for pricing pressures to emerge in an environment of strong local and global competition.” “The outlook for business investment looks to be more positive than it has for some time” and “following recent data revisions non-mining business investment now appears to be increasing by more than previously thought.”
“The stimulatory setting of monetary policy in Australia has supported the economy and helped generate a decline in unemployment. Over the period ahead, further progress on reducing spare capacity in the economy is expected, which in turn would support the forecast gradual increase in inflation.” Among key uncertainties, “the decision by Chinese authorities to implement substantial cuts to steel production for environmental reasons over the next few months increases the likelihood of near-term volatility in Chinese iron ore and coking coal demand.”