The Reserve Bank of Australia has kept the cash rate on hold at record lows for the 14th month in a row, warning that wage growth will remain sluggish “for a while yet”.
The cash rate has been at 1.5 per cent since August 2016. There hasn’t been a rate hike now for almost seven years.
Announcing the decision on Tuesday afternoon, RBA governor Philip Lowe was upbeat about the outlook for the Australian economy, pointing to upward trends in investment, employment and the terms of trade.
However, the governor highlighted three factors that will place an obstacle to a future a rate hike: low wage growth, low inflation and a strong Aussie dollar.
“Wage growth remains low. This is likely to continue for a while yet, although the stronger conditions in the labour market should see some lift in wage growth over time,” he said.
He said he also expected inflation to pick up gradually “as the economy strengthens”, but gave no projected timeframe.
Mr Lowe added that the stubbornly high exchange rate would weigh on the outlook for output and employment.
“An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast,” he said.
On the question of house price growth – which has been fuelled by record low borrowing costs – Mr Lowe said the problem had been in part solved by the Australian Prudential Regulation Authority’s restrictions on bank lending to property investors.
“Following some tightening in credit conditions, growth in borrowing by investors has slowed a little recently,” he said.
Overall, he said the record low interest rates were “continuing to support the Australian economy”.
Commenting on the RBA’s decision, Callam Pickering, an economist with global job site Indeed, said the key to a future rate hike was wage growth – and as yet, a significant improvement was not on the horizon.
“Labour market conditions and inflation remain the key for monetary policy,” he said.
“Recent employment growth has been stronger than expected and data on job advertisements has certainly been encouraging. Wage growth, however, remains the missing piece of the puzzle despite improved business conditions and profitability.
“Until wage growth begins to improve there is no urgency for the Reserve Bank to hike the cash rate. Without a strong contributions from wages, we consider it unlikely that core inflation will push above the lower end of the RBA’s target band of 2 to 3 per cent.
“A weaker Australian dollar, perhaps due to lower commodity prices, could potentially change that but so far the dollar remains stubbornly high.”
Mr Pickering predicted rates would remain at 1.5 per cent until the second half of 2018.