Statement by Philip Lowe, Governor: Monetary Policy Decision

At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.

The global economy grew above trend in 2018, although it slowed in the second half of
the year. The slower pace of growth has continued into 2019. The outlook for the global
economy remains reasonable, although downside risks have increased. The trade tensions
remain a source of uncertainty. In China, the authorities have taken further steps to
ease financing conditions, partly in response to slower growth in the economy. Globally,
headline inflation rates have moved lower following the earlier decline in oil prices,
although core inflation has picked up in a number of economies. In most advanced
economies, unemployment rates are low and wages growth has picked up.

Overall, global financial conditions remain accommodative. They have eased recently
after tightening around the turn of year. Long-term bond yields have declined,
consistent with the subdued outlook for inflation and lower expectations for future
policy rates in a number of advanced economies. Also, equity markets have risen,
supported by growth in corporate earnings. In Australia, short-term bank funding costs
have moderated, although they remain a little higher than a few years ago. The
Australian dollar has remained within the narrow range of recent times. While the terms
of trade have increased over the past couple of years, they are expected to decline over
time.

The Australian labour market remains strong. There has been a significant increase in
employment and the unemployment rate is at 5 per cent. A further decline in the
unemployment rate to 4¾ per cent is expected over the next couple of years. The vacancy
rate is high and there are reports of skills shortages in some areas. The stronger
labour market has led to some pick-up in wages growth, which is a welcome development.
The improvement in the labour market should see some further lift in wages growth over
time, although this is still expected to be a gradual process.

Other indicators suggest growth in the Australian economy slowed over the second half of
2018. The central scenario is still for the Australian economy to grow by around 3 per
cent this year. The growth outlook is being supported by rising business investment,
higher levels of spending on public infrastructure and increased employment. The main
domestic uncertainty continues to be the strength of household consumption in the
context of weak growth in household income and falling housing prices in some cities. A
pick-up in growth in household income is nonetheless expected to support household
spending over the next year.

The adjustment in the Sydney and Melbourne housing markets is continuing, after the
earlier large run-up in prices. Conditions remain soft in both markets and rent
inflation remains low. Credit conditions for some borrowers have tightened a little
further over the past year or so. At the same time, the demand for credit by investors
in the housing market has slowed noticeably as the dynamics of the housing market have
changed. Growth in credit extended to owner-occupiers has eased further. Mortgage rates
remain low and there is strong competition for borrowers of high credit quality.

Inflation remains low and stable. Underlying inflation is expected to pick up over the
next couple of years, with the pick-up likely to be gradual and to take a little longer
than earlier expected. The central scenario is for underlying inflation to be 2 per cent
this year and 2¼ per cent in 2020. Headline inflation is expected to decline in the near
term because of lower petrol prices.

The low level of interest rates is continuing to support the Australian economy. Further
progress in reducing unemployment and having inflation return to target is expected,
although this progress is likely to be gradual. Taking account of the available
information, the Board judged that holding the stance of monetary policy unchanged at
this meeting would be consistent with sustainable growth in the economy and achieving
the inflation target over time.

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