The Reserve Bank of Australia has announced that the cash rate remains steady once again at 1.5 percent. This August marked two years since the last change. In fact, the cash rate hasn’t increased since November 2010.
According to RBA Governor, Philip Lowe, there are a few national and international factors keeping the rate steady for now.
The Australian business forecast is generally positive, with high levels of public infrastructure investment, and non-mining business investment increasing.
“In Australia, money-market interest rates are higher than they were at the start of the year, although they have declined somewhat since the end of June,” says Lowe.
The biggest uncertainty is currently in Australian household consumption – falling dwelling values, increased petrol and electricity prices, and slow wage growth.
“Household income has been growing slowly and debt levels are high. The drought has led to difficult conditions in parts of the farm sector,” says Lowe.
A flat cash rate attempts to address sluggish wage growth in Australia. Lowe suggests that gradual progress is being made. Unemployment is also making slight improvements, but keeping the cash rate steady means wage growth and unemployment continue to head in the right direction.
It’s no secret dwelling prices have fallen steadily in recent months, and this too contributes to the RBA’s decision. “Conditions in the Sydney and Melbourne housing markets have continued to ease and nationwide measures of rent inflation remain low,” says Lowe. Falling values are partly due to changing dynamics in the property market, driven by reduced demand from investors, and tighter lending standards.
The steady cash rate also responds to conditions beyond Australian shores. Although the Australian dollar has remained relatively steady in the last two years, globally inflation remains low. Growth in China has slowed. And there is uncertainty in international trade policy from the United States.
Forecasters predict the cash rate will remain at record lows for now. The low rate is doing its job. Keeping interest rates low supports the Australian economy. Gradual progress is being made to improve wage growth, and unemployment. It also helps inflation return to target.
“Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time,” says Lowe.