The word “gradual” is dominating the Reserve Bank’s thinking, appearing four times in a short statement accompanying its latest decision to leave interest rates unchanged.
The Reserve Bank has left official interest rates on hold for a record 26th month at a record low rate of 1.5 per cent.
No economists or traders expected a move, with most expecting rates to remain unchanged until at least the second half of next year.
“The RBA has made it increasingly clear that it is in no hurry to start raising rates,” economist Saul Eslake told Finder’s interest rate survey.
“Although economic growth is now running ‘above trend’, unemployment and underemployment are still higher than the RBA wants, and inflation is lower than the RBA wants — and it expects progress on both of these fronts to be only ‘gradual’.”
When interest rates next move, it is very likely to be up, according to 85 per cent of the analysts surveyed.
However, not only is that move likely to be a long way off, when the rate rises come they are likely to match the US Federal Reserve’s approach so far, which has been to edge monetary policy back to normal very slowly.
“The low level of interest rates is continuing to support the Australian economy,” concluded RBA governor Philip Lowe in his post-meeting statement.
“Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual.”
Because unemployment is expected to reduce only slowly, Dr Lowe is not expecting wage growth and inflation to race out of control.
“Wages growth remains low, although it has picked up a little,” he noted.
“The improvement in the economy should see some further lift in wages growth over time, although this is likely to be a gradual process.”
RBA relaxed about housing downturn, credit squeeze
Reading between the lines, the Reserve Bank also sees the east coast housing downturn — a source of angst among an increasing number of analysts — as gradual and non-threatening.
In contrast to some private sector forecasts of a possible credit crunch, where borrowers struggle to get loans and house prices collapse, Dr Lowe said creditworthy borrowers can still get finance at low interest rates.
“Conditions in the Sydney and Melbourne housing markets have continued to ease and nationwide measures of rent inflation remain low,” he wrote.
“Growth in credit extended to owner-occupiers remains robust, but demand by investors has slowed noticeably as the dynamics of the housing market have changed.
“Credit conditions are tighter than they have been for some time, although mortgage rates remain low and there is strong competition for borrowers of high-credit quality.”
Data out on Monday showed the biggest monthly drop in national home prices since the global financial crisis, according to Capital Economics.
Although the analysts at Capital Economics expect property prices to fall even faster and further.
“We don’t think this marks a lasting turning point as the full effect of tighter credit conditions and higher mortgage rates has yet to be felt,” noted Capital Economics analyst Marcel Thieliant.
“Indeed, the downward momentum in prices has accelerated. In Melbourne and Sydney, prices are falling at a three-month annualised rate of around 10 per cent, and by 8 per cent across all eight capital cities.
“Prices in Adelaide and Brisbane seem to be levelling off and may soon start to fall in earnest.
“Our view is that house prices may eventually fall by 12 per cent, which would be the longest and deepest housing downturn in at least three decades.”