RBA seen on hold for extended period; much to depend on developments in labour, housing markets: St. George Economics

The Reserve Bank of Australia (RBA) is expected to remain on hold for an extended period of time; however, this is not a universal view held in financial markets but much could depend on developments in the labour and housing markets, according to the latest research report from St. George Economics.

The central bank delivered no alarms and no surprises today. It left the cash rate on hold at 1.50 percent, as it has done since August of 2016. The accompanying statement contained a few subtle differences. These differences suggest a few more downside risks to the outlook have entered the RBA’s line of vision.

Firstly, the RBA stated there are "some signs of a slowdown in global trade, partly from ongoing trade tensions". While the RBA still characterised the global economic expansion as continuing, the ongoing trade tensions have tempered the outlook for the world economy.

The central bank’s language on the Australian dollar has shifted a touch in the wake of its appreciation in recent weeks. The RBA also refers to the tighter credit conditions facing some borrowers. The tighter credit conditions are one of a number of factors contributing to the slowdown in dwelling prices.

Despite these factors, the RBA’s commentary around the labour market was encouraging. We hold that the labour market is key to the outlook for housing. While unemployment is low and jobs growth firm, the likelihood of households experiencing stress during this housing slowdown will be minimised.

The upbeat commentary on the employment outlook is linked to the RBA’s expectations for economic activity. The RBA’s central scenario is for economic growth to average around 3-1/2 percent over this year and next.

The above-trend growth in economic activity is expected to lead to a reduction in the unemployment rate. The strengthening labour market has already “led to some pick-up in wages growth”.