Reserve Bank warns of skills shortages

The Reserve Bank of Australia has left the cash rate on hold for a 16th straight month. What changed since the last meeting?

• Job advertisements rose to 6-year highs
• Corporate profits hit record highs in the year to September
• Business investment rose 1.0 per cent in the September quarter
• The upgrade in investment expectations since February (34.1 per cent) is the biggest in 12 years
• Employment rose by 3,700 in October – the 13th straight gain – the longest run of gains in 23 years
• The jobless rate fell to a 4½-year low of 5.4 per cent
• National home prices were flat in November to be up 5.2 per cent on the year
• The Aussie dollar eased from US76.8 cents to around US75 cents
• Business conditions rose to a 20-year high
• Consumer confidence is holding above long-term averages
• Retail trade was up 0.5 per cent in October
• New vehicle sales in November were the highest for any November month
• Approvals to build new homes rose by 0.9 per cent in October after rising 0.6 per cent in September
• Global oil prices rose to fresh 2-year highs
• The Reserve Bank expects underlying inflation to hold at 1.75 per cent to December 2018

The Reserve Bank assessment

·       The Reserve Bank Board has continued to highlight the positives of “above trend” economic growth, “strong” employment growth but with low wage and price growth. But the shot across the bow was: “There are reports that some employers are finding it more difficult to hire workers with the necessary skills.” If the skill shortages become more widespread, forcing wages and prices higher, then interest rates won’t be far behind.

Perspectives on interest rates

·       The Reserve Bank has left the cash rate at 1.50 per cent. The previous move was a rate cut in August 2016 (25 basis points). There have now been 12 rate cuts since November 2011, with the Reserve Bank cutting rates from 4.75 per cent to 1.50 per cent.

·       The Reserve Bank had previously lifted rates seven times from October 2009 to November 2010 – a total of 1.75 percentage points, from 3.00 per cent to 4.75 per cent.

What are the implications of today’s decision?

·        The Reserve Bank is upbeat but an extended period of stable rates is likely. The next move in rates is up, but not until later in 2018.

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