The Reserve Bank of Australia sees interest rates remaining steady for some time, against a backdrop of soft inflationary pressures in the economy.
But the next move will be up, although not until the central bank sees signs of a tighter jobs market and a return to more average rates of price growth.
“Even so, the pick-up in wages growth is still expected to be fairly gradual,” Governor Philip Lowe told the powerful House of Representatives economics committee in Canberra on Friday.
“We still have some spare capacity in the labour market, including part-time workers who would like more hours.”
Things are moving in the right direction, he said.
“We are making progress towards full employment and having inflation return to around the midpoint of the target range, and further progress is expected,” Dr Lowe said in an opening statement to the committee.
“If we continue to make progress, you could expect the next move in interest rates to be up.”
The RBA’s cash interest rate hasn’t been raised in eight years, and currently sits a very low 1.5 per cent.
Inflation is also subdued, sitting around the bottom of the central bank’s medium-term target range of two to three per cent. The target is used by the RBA in its monetary policy deliberations and is aimed at smoothing fluctuations in the economic cycle.
“It is important to remember, though, that higher interest rates will be accompanied by faster growth in incomes than we have seen over recent times,” Dr Lowe said.
“In this sense, it will be a sign that things are returning to normal.”
In the meantime, the RBA doesn’t see much upside in prices which should be good for households.
As well, the economy appeared to have grown strongly in the first half of calendar 2018.
“Business conditions are positive and we are in the midst of an upswing in non-mining business investment,” he added.
However, he confirmed housing markets in Sydney and Melbourne had “clearly” slowed and prices were falling.
“It is good news that this adjustment is taking place at a time when global growth is strong, the labour market is positive and interest rates are low,” Dr Lowe said.
“All these things are helping with the adjustment. We are nevertheless continuing to keep a close eye on housing market developments across the country.”
But Dr Lowe was wary of an escalation in global trade tensions after the US slapped higher tariffs on some of its trading partners.
“If this were to occur, this could be the channel through which the trade tensions sap the current positive momentum in the global economy,” he said.
*Article extracted from Perth Now Sunday Times 17/08/2018