RBA likely to leave interest rates unchanged throughout this year, says St. George Economics

The Reserve bank of Australia (RBA) is expected to leave its benchmark interest rate unchanged throughout this year and the responsiveness of wage and inflation pressures to strength of the labour market will be key factors in determining when and how fast the RBA starts its tightening cycle, according to a recent research report from St. George Economics.

Today’s RBA February meeting minutes did not offer many surprises, given the wide range of RBA commentary over the past few weeks. It was, however, a broadly positive statement, and one gets the sense that the RBA is becoming more confident in the Australian economy, particularly in comparison to the end of last year. There was the use of the word "progress" twice in the final paragraphs of the minutes in reducing unemployment and bringing inflation closer to target.

The increased optimism was obvious with the global economy, where "global GDP growth in 2017 had exceeded expectations of most forecasters". The RBA board also notes that global growth could "continue to surprise on the upside, given the synchronized nature of the current upturn".

Domestically, the RBA continues to be more upbeat with regards to the outlook for business investment and the labor market but continues to highlight downside risks to household consumption. The central bank also noted that the "stronger-than-expected" indicators on the labor market, but that spare capacity would remain.

Meanwhile, there is "progress" in achieving the RBA’s inflation outlook and reducing spare capacity over time. However, given that spare capacity is expected to persist for some time, and the uncertainty around how the labor market, wages, and inflation will respond suggests the RBA is not close to raising rates anytime soon.

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