RBA: ‘Inflation expected to pick up over the next two years’

Speaking after the cash rate announcement, Reserve Bank governor Philip Lowe said that the bank’s forecasts for output growth and inflation were “little changed” from those of three months ago, when the cash rate was cut to its current record low.

Mr Lowe commented that the Australian economy has been growing “at a moderate rate” and that “forward-looking indicators point to continued expansion in employment in the near term”.

However, the governor added: “Inflation remains quite low. The September quarter inflation data were broadly as expected, with underlying inflation continuing to run at around 1.5 per cent. Subdued growth in labour costs and very low cost pressures elsewhere in the world mean that inflation is expected to remain low for some time.

“Low interest rates have been supporting domestic demand and the lower exchange rate since 2013 has been helping the traded sector. Financial institutions are in a position to lend for worthwhile purposes. These factors are assisting the economy to make the necessary adjustments …

“Over the next year, the economy is forecast to grow at close to its potential rate, before gradually strengthening. Inflation is expected to pick up gradually over the next two years.”

Touching on the housing market, the RBA governor noted that supervisory measures have “strengthened” lending standards, leading some lenders to take a “more cautious attitude to lending in certain segments”, while turnover in the housing market and growth in lending have both slowed.

Mr Lowe concluded that these factors — as well as the fact that the rate of increase in housing prices is lower than it was a year ago (although prices in some markets “have been rising briskly over the past few months”), and that “growth in rents is the slowest for some decades” — cumulatively led the board to judge that “holding the stance of policy unchanged … would be consistent with sustainable growth in the economy and achieving the inflation target over time”.

[Related: RBA likely to cut rates in 2017: AB]