[HSC] Economist: 6–12 August

The week in review.

The main highlight this week was the RBA deciding to leave the cash rate unchanged at 1.50 per cent, where it has been since August 2016. Later in the week, the RBA published their quarterly Statement on Monetary Policy, which provided an update to their key inflation and GDP forecasts.

1. Monetary Policy

Photo by Samson Duborg-Rankin on Unsplash

On the third of August 2016, the Reserve Bank Board decided to lower the cash by 25 basis points to the historical low of 1.50 per cent. It has been more than two years since that day, but the cash rate remains at 1.50 per cent, with no signs of it being raised any time soon. A variety of domestic and global factors contributed to this month’s decision to leave the cash rate unchanged.

Domestically, continuing strong employment growth is expected, which should maintain real GDP growth just above three per cent for 2018 and 2019. The RBA expects headline inflation to fall to 1.75% in the September quarter before increasing gradually throughout 2019 and 2020. The two key areas of concern emanating from the domestic economy are weak household consumption and declining property prices. Household consumption has been constrained for some time due to stagnant wages growth and high debt levels. House prices soared from 2013 to 2017, placing upward pressure on the cash rate, however, they have now begun to fall, reducing the need for the RBA to raise the cash rate.

The main source of global uncertainty remains the United States’ trade policy under President Trump, with this week’s attack on Turkey just the latest in a series of protectionist measures he has authorised in recent months.

A disruption to global trade flows would be very harmful to the Australian economy and consequently,

“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.”

HSC Relevance

  • The cash rate has now been at the historical low of 1.50 per cent for over two years. This is substantially below the estimated neutral rate of 3.50 per cent.
  • The downward trend in house prices is contrary to the effects that would be expected through the ‘asset prices and wealth channel’ of the transmission mechanism of monetary policy. This indicates the role of other factors such as enhanced prudential supervision and restrictions on foreign investment.

2. Elsewhere around the Globe

  • A rapid rise in imports caused China’s trade surplus to fall substantially in July to $US28.05 billion, whilst inflation increased from 1.9% to 2.1%.
  • Preliminary estimates put second quarter annualised economic growth in Japan at 1.9%, compared to the 0.9% (annualised) contraction that took place in the first quarter.
  • Meanwhile, preliminary estimates of growth in the UK returned a 1.3% figure. This news was accompanied by BOGS deficit of £1.861 billion for the month of June.
  • In the United States, underlying inflation increased to 2.4% in July, whilst headline inflation remained steady at 2.9%.

Further Reading

This series of weekly articles aims to compile the important economic news of the week into bite-sized summaries with HSC-specific takeaways. 
You can expect a new article every Sunday at 6pm!