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Debt complicates RBA policy ahead of September call

By Sarah Simpkins and Cameron Micallef · September 02 2019
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Debt complicates RBA policy ahead of September call

Debt complicates RBA policy ahead of September call

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By Sarah Simpkins and Cameron Micallef · September 02 2019
Reading:
egg
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RBA

The Reserve Bank of Australia (RBA) has flagged high debt levels as a factor in its decision making for the upcoming cash rate, fearing Australia has less capacity to cope with economic shocks.

The RBA published its four-year corporate plan last Friday, which pointed to the banks’ exposure to housing loans and cyber security in financial institutions as the largest risks to the country’s financial stability.

Australia’s central bank is forecasting that consumer price inflation will only increase to a little under two percent over 2020 and a little above two per cent in 2021.

The RBA has announced wage growth will remain low, “reflecting spare capacity in the labour market as well as some structural factors”.

The unemployment rate is expected to remain around 5.25 per cent for a time, before declining to around five per cent in 2021.

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As a result, wages growth is expected to remain stable and then increase modestly from 2020. 

The central bank noted that policymakers in the US and other countries are employing quantitative easing as a result of intensifying trade and technology disputes.

On a global level, the RBA reported that labour market conditions remain tight in major advanced economies, although unemployment rates are at multi-decade lows.

“Global interest rates and measures of financial market volatility both remain low compared with historical experience,” the RBA flagged.

“The future path of global monetary policy and financial conditions more generally remain subject to substantial uncertainty. These global factors significantly influence the environment in which monetary policy in Australia is conducted,” it continued.

It comes after last week’s reflection on the RBA’s previous cash rate decisions by governor Philip Lowe.

“So the question the Reserve Bank Board often asks itself in making its interest rate decision is how our decision can best contribute to the welfare of the Australian people,” the governor offered.

“Keeping inflation close to target is part of the answer, but it is not the full answer,” he outlined.

“Given the uncertainties we face, it is appropriate that we have a degree of flexibility, but when we use this flexibility we need to explain why we are doing so and how our decisions are consistent with our mandate.”

The RBA is due to make its next decision on Australia’s cash rate on Tuesday, 2 September, 2019.

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