The Australian dollar surged to a two-year high after the Reserve Bank delivered an optimistic assessment of infrastructure investment, government spending and household consumption on Tuesday.
But concerns about consumers battling with rising electricity prices, underemployment and torpid wage growth were highlighted by the board in the minutes of its July meeting as some of the reasons for leaving the cash rate at the record low of 1.5 per cent.
While displaying a reluctance to follow the US Federal Reserve and the Bank of Canada in raising the cash rate, the board’s minutes showed the strongest sign yet that the next rate move will be up.
The board said a “neutral” cash rate of 3.5 per cent would be the point at which stable inflation and economic expansion were likely to meet.
The Australian dollar hit its highest point since May 2015 at US79.04¢ following the release.
On housing, the board said conditions in Melbourne and Sydney, where prices have risen by 14 per cent and 12 per cent over the past year, had softened recently, while house prices in Perth and apartment prices in Brisbane had fallen further.
In what could be seen as a warning on a future housing downturn, the board noted “several periods in the preceding decade in which housing prices had fallen, or growth had slowed significantly, in different parts of the country”.
Members said it was too early to tell if the crackdown on home investor lending by banking regulator, the Australian Prudential Regulation Authority, had had their full effect. The regulator launched a string of tough new measures in April designed to slow house price growth and help address the risks associated with rising levels of indebtedness.
On wages, the board offered up some optimism for workers by noting the Fair Work Commission’s 3.3 per cent increase in award wages.
“[This] was likely to affect the wages of around two-fifths of workers,” the board said after adding the unemployment rate had declined by 0.3 percentage points over the previous two months, to its lowest rate since early 2013.
The board noted that wholesale electricity prices had risen sharply over the first half of 2017 and that this had led to significant increases in prices for customers, highlighting “efforts to address climate change, policy uncertainty and its impact on the investment decisions” as contributing factors.
In June, EnergyAustralia announced it would increase electricity prices in Sydney by 19.6 per cent – or $320 a year – from July 1.
We would need to see an upgrade to wage and inflation forecasts to put rate hikes on the table any sooner than 2018.
Commonwealth Bank economist Kristina Clifton
Globally, the RBA remained positive, highlighting the resilient Chinese demand for commodities and the temporary slowdown in the US economy in the March quarter, with consumption starting to pick up again.
Analysts remained sceptical of any rate hikes before next year.
“Today’s minutes seemed to have a more positive tone overall, with the RBA acknowledging recent strength in the labour market and the generally positive flow of data for the June quarter,” Commonwealth Bank economist Kristina Clifton said.
“[But] we would need to see an upgrade to wage and inflation forecasts to put rate hikes on the table any sooner than 2018.”
Capital Economics’ Paul Dales said the minutes of July’s meeting suggested the RBA was not itching to follow other central banks by raising interest rates in Australia.
“If we are right in thinking that rates won’t be raised until 2019, the Australian dollar may yet fall from $US0.78 to $US0.70,” he said.