Ongoing weakness in the labour market is giving the RBA no reason to raise interest rates, and plenty of reason not to.
In the minutes of its board’s May monetary policy meeting, the central bank signalled interest rates would be kept low for the indefinite future.
Or, in the language of central banks, “the current accommodative stance of policy was likely to be appropriate for some time yet”.
The RBA’s charter requires it to pursue both full employment and low inflation.
The outlooks for both are dominated by below-average economic growth.
The economy looked to have grown at about its long-run average in the March quarter of this year, boosted by export growth, but that would not last, the RBA said.
“With this pace of export growth unlikely to be sustained, output growth was expected to be somewhat slower over the next few quarters,” it said.
This lacklustre pace of economic growth underpinned an outlook for similarly sluggish employment growth, because where economic growth goes, employment growth follows soon after.
“Although employment growth was anticipated to strengthen, this was not likely to exceed population growth consistently for some time as the improvement in the labour market was expected to be relatively protracted,” the RBA said in the minutes.
That dreary outlook for jobs gives the RBA a reason to keep its foot on the monetary accelerator, leaving the cash rate at its record low of 2.5 per cent.
And the other aspect of the RBA’s mandate, keeping inflation under control, gives it no impetus to put the brakes on.
Again, the key is the weakness in the labour market, caused by sluggish economic growth.
That has caused lower wage growth, which in turn means lower inflation for items more sensitive to labour costs, the RBA said.
The downward pressure on wages had offset the inflationary effect of the fall in the Australian dollar’s value from a year earlier, although that inflationary effect had been partially nullified by the currency’s recovery from lows earlier this year.
As a result, the RBA said, inflation is expected to stay in line with its two to three per cent target over the next couple of years.
So there’s no reason to consider raising the cash rate for the time being and, accordingly, the RBA has again made it clear a rate hike is not on its agenda.
