Yesterday the Reserve Bank of Australia left their cash rate unchanged at 0.75% and impressed with a calm economic outlook. The economy is trucking along.
It’s worth reviewing the statement the RBA’s governor Philip Lowe made when announcing their Monetary Policy Decision. Australia’s economy affects New Zealand to a greater extent than most, and their economic outlook is very similar to ours.
For those worried by the doom & gloom merchants whose predictions are seized upon by the media and embellished with alarmist headlines such as…
- “House of cards will tumble down on consumers”
- “Nightmare begins as Australia prepares to launch QE”
- “How to protect your money from the greatest recession and global meltdown”
… Governor Lowe’s commentary is calmly reassuring and a much better indicator of what is likely to happen. Of course there’s always the chance of a black swan event, but the safe bet is the picture Governor Lowe paints.
I’ll simply republish it here with added paragraph headers…
Global economic outlook
“The outlook for the global economy remains reasonable. While the risks are still tilted to the downside, some of these risks have lessened recently.
“The US-China trade and technology disputes continue to affect international trade flows and investment as businesses scale back spending plans because of the uncertainty.
“At the same time, in most advanced economies unemployment rates are low and wages growth has picked up, although inflation remains low.
“In China, the authorities have taken steps to support the economy while continuing to address risks in the financial system.
“Interest rates are very low around the world and a number of central banks have eased monetary policy over recent months in response to the downside risks and subdued inflation. Expectations of further monetary easing have generally been scaled back.
“Financial market sentiment has continued to improve and long-term government bond yields are around record lows in many countries, including Australia. Borrowing rates for both businesses and households are at historically low levels. The Australian dollar is at the lower end of its range over recent times.
Australian economic outlook
“After a soft patch in the second half of last year, the Australian economy appears to have reached a gentle turning point. The central scenario is for growth to pick up gradually to around 3% in 2021.
“The low level of interest rates, recent tax cuts, ongoing spending on infrastructure, the upswing in housing prices and a brighter outlook for the resources sector should all support growth.
Sources of uncertainty
“The main domestic uncertainty continues to be the outlook for consumption, with the sustained period of only modest increases in household disposable income continuing to weigh on consumer spending. Other sources of uncertainty include the effects of the drought and the evolution of the housing construction cycle.
“The unemployment rate has been steady at around 5.25% over recent months. It is expected to remain around this level for some time, before gradually declining to a little below 5% in 2021.
“Wages growth is subdued and is expected to remain at around its current rate for some time yet. A further gradual lift in wages growth would be a welcome development and is needed for inflation to be sustainably within the 2-3% target range. Taken together, recent outcomes suggest that the Australian economy can sustain lower rates of unemployment and underemployment.
“Inflation is expected to pick up, but to do so only gradually. In both headline and underlying terms, inflation is expected to be close to 2% in 2020 and 2021.
“There are further signs of a turnaround in established housing markets. This is especially so in Sydney and Melbourne, but prices in some other markets have also increased recently.
“In contrast, new dwelling activity is still declining and growth in housing credit remains low. Demand for credit by investors is subdued and credit conditions, especially for small and medium-sized businesses, remain tight. Mortgage rates are at record lows and there is strong competition for borrowers of high credit quality.
“The easing of monetary policy this year is supporting employment and income growth in Australia and a return of inflation to the medium-term target range.
“The lower cash rate has put downward pressure on the exchange rate, which is supporting activity across a range of industries. It has also boosted asset prices, which in time should lead to increased spending, including on residential construction.
“Lower mortgage rates are also boosting aggregate household disposable income, which, in time, will boost household spending.
Monetary policy decision
“Given these effects of lower interest rates and the long and variable lags in the transmission of monetary policy, the Board decided to hold the cash rate steady at this meeting while it continues to monitor developments, including in the labour market.
“The Board also agreed that due to both global and domestic factors, it was reasonable to expect that an extended period of low interest rates will be required in Australia to reach full employment and achieve the inflation target.
“The Board is prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time.”
The key outtakes are that things don’t look too bad, monetary policy measures are working, interest rates are going to stay low for “an extended period”, and the economy has “reached a gentle turning point” with expectations for “growth to pick up gradually to around 3% in 2021”. Australia’s economic outlook could just as easily apply to New Zealand don’t you think?