RBA leaves rates on hold despite growth and inflation continuing to miss targets

| 02.04,19. 06:24 PM |

RBA leaves rates on hold despite growth and inflation continuing to miss targets

Photo: The Reserve Bank is prepared to bide its time waiting for wages to pick up. (Reuters: Jason Reed)

The Reserve Bank has continued to extend its record-breaking run of leaving interest rates on hold.

The bank's board left its official cash rate at the historic low of 1.5 per cent for the 29th consecutive meeting.

Despite both economic growth and inflation continuing to undershoot forecasts, the decision was not a surprise.

The market had forecast only a 4 per cent chance of a change in April, however it has priced in a full 0.25 percentage point rate cut by September.

A drop in the unemployment rate below 5 per cent and a lift in the forward-looking job vacancy data last month helped firm the RBA's decision to keep interest rates on hold.

Jobs vs GDP data

In his regular post-decision statement, RBA governor Philip Lowe emphasised the strength of the labour market and pick-up in wages as a "welcome development".

"Continued improvement in the labour market is expected to see some further lift in wages growth over time, although this is still expected to be a gradual process," Dr Lowe said.

However, he conceded GDP data painted "a softer picture of the economy than do the labour market data".

"Growth in household consumption is being affected by the protracted period of weakness in real household disposable income and the adjustment in housing markets," he said.

"The drought in parts of the country has also affected farm output.

"Offsetting these factors, higher levels of spending on public infrastructure and an upswing in private investment are supporting the growth outlook, as is the steady growth in employment."

$A falls

However, Dr Lowe's statement ended with slightly "dovish" change in language, which led to currency traders selling the Australian dollar down below 71 US cents.

"The board will continue to monitor developments and set monetary policy to support sustainable growth in the economy and achieve the inflation target over time," Dr Lowe said.

J.P. Morgan's Sally Auld said the subtle changes in language were important.

"Previous communications had simply observed that leaving policy unchanged was consistent with sustainable growth in the economy and achieving the inflation target over time. The key phrase in this month's statement is 'monitor developments'," Ms Auld said.

"Second, the statement no longer refers to the economy growing at 3 per cent this year. Instead, the statement refers to the divergence between labour market and GDP outcomes."

Pepperstone Group's Chris Weston said it was a change in language the market will keep in mind.

"The bank has provided themselves flexibility to cut, and can change the language more intently in May, with further emphasis on labour market reads."


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