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Cash Rate Remains on Hold

The Reserve Bank has left the official cash rate on hold at 1.5 percent, the same position it has been in since August 2016 when rates were edged down by 0.25 percentage points. The widely expected move was already factored in by the markets, despite the fact that inflation was weaker than expected in third quarter CPI figures. While the Australian economy is still ticking over, low inflation and slow wages growth are likely to have a negative influence on consumer confidence and retail sales in the lead up to Christmas.

According to the RBA in its official statement on Melbourne Cup Day, rates are likely to remain low while the economy remains subdued: “One continuing source of uncertainty is the outlook for household consumption... Household incomes are growing slowly and debt levels are high... Inflation remains low, with both CPI and underlying inflation running a little below 2 per cent. In underlying terms, inflation is likely to remain low for some time, reflecting the slow growth in labour costs and increased competitive pressures, especially in retailing.”

Consumer price inflation rose by 0.6 percent during the September quarter, making it 1.8 percent higher for the year. This is below the RBA's target of 2-3 percent, a range not met for two years now despite in-house forecasts that it would pick up at a greater pace. In its latest quarterly statement on monetary policy, the RBA eased back on the previous forecast released in August, with 2.5 percent growth expected in December 2017 and 3.25 percent growth expected in December 2018 - lower than the 3.75 percent forecast last quarter. While "the drag on growth from the end of the mining boom has eased and is likely to end some time in the next year or so," according to the RBA, inflation and wages growth are only likely to rise "gradually over time".

Despite strong job growth and positive signs for business investment, the Reserve Bank are unlikely to raise interest while wages and property prices fail to break new ground. According to Paul Dales from Capital Economics, "we believe the RBA won't raise interest rates from their current record low of 1.5 per cent at all next year... The RBA will view the rise in utilities prices as a hit to real incomes that could restrain consumption rather than a sign that inflation is building. Indeed, there was no evidence that firms are passing on higher energy prices to households as inflation in other parts of the economy stayed unusually weak."

Current economic conditions are starting to have a negative impact on consumers and the retail sector, with the latest ANZ-Roy Morgan Consumer Confidence Index recently falling to its lowest value in two months. According to the Australian Bureau of Statistics, there was zero growth in retail turnover in September, well below an expected increase of 0.4 percent. It was the third consecutive month of disappointing retail figures, meaning bad news for retailers in the lead up to the Christmas period. While strong competition in the retail sector can be good news for consumers, high levels of household debt and weak wage growth around 2 percent in recent quarters are constraining factors.


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