RBA: ‘We do not expect inflation to fall further’

In his recent opening statement to the House of Representatives standing committee on economics, RBA governor Philip Lowe said that the bank had expected the inflation rate (in terms of consumer prices) to “remain above 2 per cent” last year, but noted that it “turned out to be lower than this”, coming in at around 1.5 per cent.

This marked the lowest annual inflation rate in nearly 20 years, as the last time the Consumer Price Index rose by 1.5 per cent (or less) was in 1997.

Speaking of the drop, Mr Lowe said: “Wage growth has been quite subdued, reflecting spare capacity in the labour market and the adjustment to the unwinding of the mining investment boom. We anticipate the subdued outcomes to continue for a while yet. Increased competition in retailing is also having an effect on prices, as is the low rate of increase in rents.”

Despite this, Mr Lowe said that the bank does not expect the rate of inflation to fall further, adding that there are “reasonable prospects for inflation to rise” over time.

He said that the recent improvement in the global economy provides “some extra assurance on this front” and therefore estimated that the headline inflation rate would be “back above 2 per cent later this year”, boosted by higher prices for petrol and tobacco. However, he said the pick-up in underlying inflation would be more gradual.

Economic growth target on track

As well as lower-than expected inflation, Mr Lowe noted that the Australian economy also grew less quickly than expected – but again reaffirmed his optimism at this picking up.

He said: “A year ago, we were expecting the Australian economy to grow by around 2.5-3 per cent in 2016. We haven't yet received the final figures for the year, but the outcome is likely to be lower, at around 2 per cent.”

According to the governor, the September quarter was “surprisingly weak”, but noting that this was “largely reflecting temporary factors”, he said that the bank was “not expecting a repeat of this for the December quarter”.

Indeed, Mr Lowe said that there were indications of “a return to reasonable growth in the quarter”.

He continued: “Looking forward, we still expect the Australian economy to grow by around 3 per cent this year and next. For most of the time since 2012 we have been facing headwinds from declining mining investment and falling commodity prices. Then, around the middle of last year, the headwind from falling commodity prices turned into a gentle tailwind as commodity prices lifted. And the headwind from falling mining investment should blow itself out before too long as mining investment returns to more normal levels. We will also benefit over the next few years from large increases in production of liquefied natural gas.”

The RBA said it was “watching closely” the cycle in residential construction activity, saying that it expects some “further growth” in this area, but noting tightening of conditions for property developers in some markets (i.e. apartment developers in Melbourne).

He added that the recent “pick-up” in growth in credit to investors, “needs to be watched carefully”.

[Related: Ratio of household debt to income ‘at record high’]