‘Some time’ before inflation, jobs reach their targets: RBA

The Reserve Bank of Australia said the economy was some way off full employment and inflation returning to the midpoint of its target, signalling policy will stay on hold.

Main takeaways

  • Reserve Bank of Australia leaves inflation and economic growth forecasts unchanged from three months earlier in quarterly Statement on Monetary Policy released on Friday
  • Forecast unemployment cut to 5.25 per cent for year ending June 2018 through to year ending June 2019, from 5.5 per cent seen three months earlier
  • Near-term growth outlook for major trading partners “is a little stronger” than seen in November; growth in China expected to “moderate a little” over coming year
  • Most of decline in mining investment has now passed, meaning resource sector should make positive contribution to GDP over next few years
  • Large pipeline of public infrastructure work to be done is supporting GDP growth as well as conditions in some parts of the private sector
  • Australian dollar bought 77.72 US cents at 11.40am in Sydney, from 77.85 US cents before the report’s release.

State of play

The waiting game continues: while the RBA is growing confident the economy is on the right track, with jobs booming and business investment rising, a host of uncertainties remain about timing. The reaction of households to high debt and weak income growth; global retailers bringing disinflation to local consumer goods; and worldwide inflation and the pace of global tightening – Aussie policy makers intend to sit tight as it all unfolds.

Key quotes

“Over the course of 2017, the unemployment rate declined and inflation increased a little,” said the RBA.

“Further progress on both fronts is expected over the next couple of years. It will be some time, however, before the economy reaches current estimates of full employment and inflation returns to the midpoint of the target.”

“Financial market volatility has picked up in recent days, most notably in equity markets as market participants have begun to reassess the outlook for global inflation and the speed of withdrawal of monetary accommodation.”

“Forward indicators of labor demand suggest that employment will continue to expand in coming months, though not at quite as rapid a rate as seen recently,” the RBA said. “It is unclear whether participation rates will increase further and, if so, by how much.”

“Slow growth in labor costs has weighed on price growth, particularly for retail goods and some market services. Strong competition among retailers is contributing to ongoing deflation in prices of consumer durables and several other retail categories.”

On China: “Fiscal policy and solid growth in financing continues to support growth, but weaker property market conditions and environment-related restrictions are expected to have a dampening effect.”

The background

RBA governor Philip Lowe has kept interest rates at a record-low 1.5 per cent for 16 meetings as the economy adjusts from a mining investment boom to services-driven growth.

While hiring has surged in recent months, rising population growth and a jump in labor-force participation have prevented its full pass-through to the jobless rate.

Meantime, heavily indebted households from a Sydney property bubble together with weak wage growth are a constraint on consumption that accounts for more than half of GDP.


Source (The Age): ‘Some time’ before inflation, jobs reach their targets: RBA

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