RBA keeps rates on hold at record low 1.5 per cent
The Reserve Bank of Australia has left the cash rate on hold at 1.5 per cent for a 20th consecutive meeting.
Sluggish wage growth and inflation drove the decision despite a continued economic recovery from underlying weakness. The RBA alluded to the impact of the banking royal commission in a policy statement for the first time and continued to warn of the dangers of a US-driven trade breakdown on the global economy.
The market has not fully priced in a rate rise until October 2019, by which time rates would have been on hold for more than three years - the entirety of Philip Lowe's tenure as governor.
"The low level of interest rates is continuing to support the Australian economy," the RBA statement said. "Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual."
The record-low cash rate has resulted in standard variable mortgage rates for home owners remaining at their lowest level since 1965, averaging 5.2 per cent.
"Even if mortgage rates do rise, they are still well below the 20-year average of 6.8 per cent," CoreLogic head of research Tim Lawless said.
Despite mortgage rates being low, activity in the housing market has slowed since 2015, with national dwelling values down 1.1 per cent from their peak in November last year.
The central bank cautioned that trend was likely to continue as banks tighten their lending practices in response to calls from regulators and the royal commission.
In his statement, Dr Lowe said housing credit growth had slowed, especially to investors.
"The Australian Prudential Regulation Authority's supervisory measures and tighter credit standards have been helpful in containing the build-up of risk in household balance sheets, although the level of household debt remains high," he said.
"While there may be some further tightening of lending standards, the average mortgage interest rate on outstanding loans is continuing to decline."
Capital Economics chief economist Paul Dales said the royal commission was likely to "significantly influence the economy" through tighter credit conditions crimping GDP growth and containing price pressures.
"That would mean the 'progress in reducing unemployment and having inflation return to target' would be even more 'gradual' than the RBA expects," he said.
The low interest rate environment is providing some relief to homeowners struggling with costs of living rising in other areas, particularly energy prices and school fees.
Wage growth recorded its second-weakest quarterly result in two decades in March, after it fell below market expectations to increase by just 2.1 per cent.
The RBA noted that employment has grown strongly over the past year, but added it had "slowed in recent months" despite remaining at historically high levels. Underemployment remains a concern at 8.3 per cent.
Dr Lowe suggested wage rises should start to materialise in areas where there is a shortage of workers.
The board remained optimistic that the economy would kick along at above 3 per cent in 2018-19, beating the expectations of the May budget.
The RBA found business conditions were positive and non-mining business investment was increasing, while higher levels of public infrastructure investment and strong growth in exports were supporting the economy.
"One continuing source of uncertainty is the outlook for household consumption," Dr Lowe said. "Household income has been growing slowly and debt levels are high."
Globally, the RBA noted other central banks had had to raise interest rates and withdraw monetary stimulus and that "further steps in this direction are expected".
The board pointed to political turmoil in Italy affecting the eurozone and warned there were "also concerns about the direction of international trade policy in the United States".
Despite the risks, the RBA found that overall, financial conditions remained expansionary.