Reserve Bank of Australia (RBA) has found itself emboldened by a period of strong job growth in the country, which, when coupled with good wage growth, has allowed it to keep interest rates steady for now.
RBA said that its original plan was to try and encourage the market without having to stimulate it through interest rate rises. Its allies at the US Federal Reserve have been doing this to good effect. The fact that the job market keeps improving means that RBA is no longer concerned about the state of wages, and it hopes that household disposable incomes will now rise.
The only main sticking point for the Australian economy at present is the obvious housing slump gripping many of the major cities. Numerous buyers are shying away from higher prices, and overseas investors are deciding not to put too much of their capital into Australian real estate. This may yet lead RBA to determine that the only course of action is to bump up interest rates to boost lending habits, but this will not occur in the short term.
There was initially going to be a line in RBA Governor Phillip Lowe’s statement this week referring to weak wage growth, but he did not deliver it. Instead, he called wage improvement a ‘welcome development’ that vindicates recent policy decisions. The bank has left the cash rate at 1.5%, where it has stayed since August 2016.
Jobs have been the real winner for Lowe and his team. The Australian unemployment rate is at 5%, the lowest it has been for more than six years, which shows that the economy is in a positive state right now. This also comes at a time of global instability and volatility in the market. RBA’s decision to drop the Australian dollar against its US counterpart was a good move for boosting growth.
Data released on Wednesday has shown that the Australian GDP has bumped up a further 3.3% in the year leading to the end of the last quarter, which gives RBA further scope to enact more of its chosen policies.
Lowe said in a speech that because the economy is ‘expected to continue to grow above trend, a further reduction in the unemployment rate is likely.’ He added that this could well indicate that ‘the economy should see some further lift in wages growth over time.’
However, Lowe did sound a cautious note on the current housing slump, particularly in Sydney and Melbourne. He said that credit lending conditions ‘are tighter than they have been for some time, with some lenders having a reduced appetite to lend.’ Lowe also cited a reduction in investor demand for mortgages, saying that this ‘has slowed noticeably.’ With a potential rise in household disposable income on the way, Australia could circumvent the current lending impasse.
It is possible that the drop in housing prices may pave the way for an interest rate rise in the future. As long as wage growth is able to outstrip inflation for a period of time, stable levels of growth in income can intertwine with rate boosts to help lending pick up once again.