RBA to keep rates on hold

Matthew Peter, Chief Economist 

Next week, the Reserve Bank of Australia (RBA) contemplates its next step in monetary policy. It does so within the context of robust global growth, a domestic economy that has recently recorded a world record for avoiding recessions, strong population growth driven by a well-regulated migration program and a rapidly improving labour market. In addition, there are an increasing number of commentators that argue that Australian housing-market fundamentals are not as stretched as previously thought given the underlying strength in population growth. Given the overall backdrop, it might seem that the RBA can afford to start contemplating its first rate hike in almost 7 years.

So what has led Australia to its world record of 26 years of recession-free growth? First is our strong population growth. Over the last 30 years, Australia’s population has grown on average by 1.4% per annum, compared to an average rate of 0.6% among our OECD counterparts. 

Of course, the advantage strong population delivers to underlying growth potential can be easily dissipated by a lack of productivity growth and on this front, Australia’s historical performance is less impressive. Although not disastrous, Australia’s growth rate in productivity has averaged 1.42% over the last 30 years compared to an OECD average of 1.46%. Overall, the combination of productivity growth and workforce growth has meant that Australia’s growth rate has averaged 3.2% compared to an OECD average of 2.4% over the last 30 years.

Second, for a small open economy exposed to international trade, and commodity price fluctuations in particular, we have an outstanding record of adjustment to economic shocks from abroad. The ability of the economy to respond positively to adverse external conditions has also instilled significant confidence among international investors in Australian assets. What has enabled a small country like Australia to weather the storms of global shocks and maintain the trust of international investors? With some pride, we can point to our history of sound management of financial markets and the macroeconomy.

Tight regulation of the banking sector has led to our four major banks enjoying a AA- credit rating and places them among a handful of banks internationally on a AA rating. Historically, our governments have managed public finances in a prudent manner with our general government (States plus Federal) debt to GDP ratio averaging just 27% over the last 30 years compared to an OECD average of 79%. Finally, the RBA has successfully managed monetary policy with a strong track record of keeping core inflation within their target band.

The combination of financial markets, low government debt and a vigilant central bank has meant that international investors have been willing to maintain a steady flow of funds into Australian assets. This has allowed the RBA to cut rates aggressively in times of adversity (such as the GFC) without triggering the flight of international capital. With the RBA able to cut rates in downturns and with the ability of our currency to adjust, the Australian economy has been successful in responding to these price signals by moving resources towards those industries most favoured by changes in the international economic environment.

While over the broad sweep of history, our record looks impressive, more recent history shows that we have stumbled. Over the last four years, government fiscal policy has failed to deliver the prudent management of public finances, energy policy has failed to deliver competitive energy costs to households and businesses, and monetary policy has led to an unaffordable housing and record high levels of debt to many Australian households.

Next week, the RBA will keep the cash at 1.5% and will not be able to raise rates for around another year. If Australia is to remain the lucky country, the pressing issues of fiscal & energy policy and household indebtedness must be addressed otherwise we will risk our AAA sovereign rating and, eventually, the confidence of international investors.

Table 1: Financial market movements, 21 - 28 September 2017

Equity index



10-yr government bond



Foreign exchange



S&P 500





3.2 bps

US Dollar Index (DXY)



Nikkei 225





3.4 bps




FTSE 100





0.8 bps









2.4 bps




S&P/ASX 200





2.9 bps




Economic Update

United States

Consumer confidence hit by hurricanes in the US
  • Durables goods orders rebounded in August, with monthly growth recovering to 1.7% after a 6.8% fall in July. Orders for core capital goods (excluding defence goods and aircraft), an indicator of business spending plans, continued to grow in August, rising 0.9% in the month, down slightly from 1.1% growth in July. Core capital goods shipments rose 0.7% in June, also down a little from 1.1% growth in July. 
  • The Conference Board’s measure of consumer confidence fell slightly to 119.8 in September, from a downwardly revised 120.4 in August. This echoes the fall in the University of Michigan’s consumer sentiment index released last week, with the impact of hurricanes Harvey and Irma likely putting a dampener on confidence.
  • A flash reading of the Markit manufacturing PMI showed a slightly improvement in manufacturing conditions in September, with index advancing to 53 in the month from 52.8 in July. This is consistent with the strength seen in other indicators, such as the ISM manufacturing index, in recent months.

Euro area / United Kingdom

Business sentiment advances higher in the euro area
  • The euro area manufacturing PMI rose from 57.4 in August to 58.2 in September, a level not seen in over six years. The services PMI also advanced in the month, pushing the composite PMI up to 56.7 in September from 55.7 in August.

China / Japan

Inflation picks up in Japan
  • Tightness in Japan’s labour market shows no signs of abating, with the unemployment rate remaining at a low 2.8% in August. Demand for labour remains very strong, as shown by the jobs-per-applicant ratio which held steady at 1.52 in August, the highest level since 1974.
  • Inflation in Japan jumped higher in August, with annual headline CPI inflation rising to 0.7%, up from 0.4% in July and marking the highest rate of price growth since March 2015. Measures of core inflation also improved in the month.
  • Improving external demand and surging exports are supporting Japan’s factory sector, with industrial production rising 2.1% in August from the previous month as manufacturers produced more autos and electronic parts. This was a strong rebound from the small monthly decline in July, and represents growth of 5.4% from this time a year earlier. Japan’s manufacturing PMI also advanced from 52.2 to 52.6 in August according to a preliminary reading.

Australia / New Zealand

Rates on hold in New Zealand
  • The Reserve Bank of New Zealand left the Official Cash Rate on hold at a record low 1.75% this week. This was the first interest rate decision with Acting Governor Grant Spencer at the helm, following the departure of Governor Wheeler whose five-year term ended this week. Acting Governor Spencer noted in his statement that policy would remain accommodative for a considerable period.

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