• The Reserve Bank of Australia (RBA) kept the official cash rate on hold at 0.10% on Tuesday as it mulled Australia’s economic recovery.
• In his monthly statement, Governor Phillip Lowe said unemployment was falling faster than expected but that the risk of future outbreaks and lockdowns, such as the one currently in force in Melbourne, threatened the recovery.
• He added that wage growth is still proving elusive, even as some labour shortages begin to appear.
• Visit Business Insider Australia’s homepage for more stories.

The Reserve Bank of Australia (RBA) expects Australia’s recovery will continue albeit with a few bumps along the way.

The central bank kept the official interest rate on hold at 0.10% on Tuesday, buoyed by the fact unemployment continues to fall and confidence is returning.

“The economic recovery in Australia is stronger than earlier expected and is forecast to continue,” Governor Philip Lowe said. “Progress in reducing unemployment has been faster than expected, with the unemployment rate declining to 5.5% in April. Job vacancies are at a high level and a further decline in the unemployment rate to around 5% is expected by the end of this year. There are reports of labour shortages in some parts of the economy.”

“Despite the strong recovery in the economy and jobs, inflation and wage pressures are subdued. While a pick-up in inflation and wages growth is expected, it is likely to be only gradual and modest.”

“An important ongoing source of uncertainty is the possibility of significant outbreaks of the virus, although this should diminish as more of the population is vaccinated.”

Rocketing property prices also remain a concern, but Lowe and his board may be hoping that they find a natural ceiling or an imposed one if regulators step in, negating the pressure to raise interest rates.

“A slowdown in dwelling price appreciation is expected as affordability constraints progressively impact market participation, and potentially tighter credit policies looms further down the track,” CoreLogic research director Tim Lawless said on Tuesday.

“Messaging from the RBA has indicated they will be watching for any signs of a deterioration in credit standards that could be a trigger for tighter lending rules.”

For the most part however, the RBA’s outlook remains rosy.

“Updates on the economic recovery remain largely positive, including better than expected outcomes for the business sector and red hot property prices,” CreditorWatch chief economist Harley Dale said.

“The synchronisation of expansionary fiscal policy and ultra-low interest rates are clearly paying dividends and the Reserve Bank of Australia (RBA) appears quite comfortable with the current situation as the central bank holds fast on interest rates until the dynamics of Australia’s inflationary pressures change.”

While the RBA is reluctant to make any major changes to its monetary policy, it is also approaching something of a cross roads with regard to the cheap money line it is supplying retail banks.

“It’s just one month to go until the RBA’s $200 billion term funding facility for banks comes to an end and questions around whether the RBA will inject additional liquidity to complement the Federal Government’s expansionary fiscal policy,” Dale said.

“[The second half of the year] will be an important time for boosting business investment and ensuring Australia’s economic recovery remains durable.”

It also remains searching for elusive wage growth, despite an ever-tightening labour market. While the central bank has cautioned interest rates are on hold until at least 2024, there is speculation the central bank may not be able to hold the line. For one, labour shortages may help push wages higher, even if the bank can’t, as inflation returns to target.

“I think it is increasingly likely that the economy will reach that point sooner than the RBA’s ‘2024 at the earliest’ – especially given that it looks as though our international borders are going to remain closed for longer, as a form of new ‘protectionism’ which, like the old sort, does give the economy a short-term ‘sugar hit’ at the expense of our longer-term wellbeing,” economist Saul Eslake with the Corinna Economic Advisor said.

Meanwhile, the OECD upgraded Australia’s growth forecasts this week, anticipating 5.1% growth this year, followed by 3.4% in 2022. The RBA is also due to hand down some revised forecasts of its own in the coming months, providing the best indication of what it might do next.

“Given the strength of a broad range of domestic indicators in the second quarter to date – including, crucially, the labour market despite the end of JobKeeper – we suspect that the RBA could upgrade its assessment of the domestic economy further at the next round of forecasting in August,” Royal Bank of Canada strategist Robert Thompson said in a note.

“The only spanner in the works could be the currently unfolding Victorian lockdown, as an extended lockdown — i.e., beyond the current 7-day period – may have the potential to start noticeably impacting activity.”

Others argue that fading government stimulus will see some of the current momentum die off by itself, without further business shutdowns.

“The risk seems to be that the stimulus-driven growth may fade and that the economy will continue to need support to push the unemployment rate to a level that sees wages growth accelerate on a sustainable basis,” IFM Investors economist Alex Joiner said.

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