RBA on hold for the 15th month in a row – likely to remain on hold out to late next year at least

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Once again, no surprises from the Reserve Bank of Australia which left the official cash rate on hold at 1.5% for the 15th month in a row following its November board meeting.

The RBA continues to see improving global conditions and has indicated that its forecasts for Australian growth to pick  up are “largely unchanged” and that it still sees inflation picking up gradually. In terms of the growth outlook it remains upbeat about the outlook for non-mining investment and employment.

Against this though, wages growth and inflation remain low, the outlook for consumer spending remains uncertain, the RBA remains concerned about the strong Australian dollar and it notes that the Sydney housing market has eased further. It’s also likely that revised CPI weights from the ABS reflecting the latest spending patterns will result in a downwards revision to the RBA’s inflation forecasts for the year ahead, to be published in this Friday’s Statement on Monetary Policy, reflecting a lower starting point for inflation – it’s probably currently running around 1.6% year on year now rather than 1.8%.

So given these conflicting conditions the RBA’s bias on interest rates remains neutral.

The RBA remains stuck between a rock and a hard place on interest rates. Improving global growth and the RBA’s own forecasts for stronger growth along with solid business conditions and employment growth argue against rate cuts. But ongoing low inflation and wages growth, uncertainty around consumer spending as highlighted by very weak retail sales in September, signs that the housing cycle is slowing and the still strong $A argue against a rate hike. We remain of the view that the RBA will leave the cash rate on hold until a probable rate hike late next year. The risk is that rates won’t start rising until 2019 though.

By Shane Oliver

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