The Reserve Bank of Australia (RBA), which has maintained its rate for a record 21 months since August 2016, added it also expects spare capacity in the economy to be reduced as business conditions are positive with non-mining business investment rising, public infrastructure investments are supporting the economy, and exports are expected to show stronger growth.
In its March and April statements, the RBA dropped an earlier reference for growth this year to be a "bit above 3 per cent" and merely said it expects faster growth.
This prompted investors to widen the odds of a rate hike this year, and the dampened prospects for growth were confirmed when data showed Australia's Gross Domestic Product grew by only 0.4 percent in the fourth quarter of 2017, below forecasts of 0.6 percent and the slowest since the third quarter of 2016.
Year-on-year the economy grew by 2.4 percent, down from 2.9 percent in the third quarter.
But the RBA appears to have turned more optimistic and its governor, Philip Lowe, confirmed at a dinner in Adelaide the economy was stronger than a year ago, with business conditions around their highest level for many years as the long-awaited pick-up in non-mining investment is taking place.
Lowe said the RBA's latest staff forecast, to be released on Friday, will show only "small changes" from the previous forecast but the central scenario for this year and next year "remains for the Australian economy to grow a bit faster than 3 per cent," supported by a "pretty positive" international backdrop.
Stronger growth should also help reduce some of the spare capacity in the economy, lowering the unemployment rate, pushing up wages and thus inflation.
In Adelaide Lowe said wage increase of around 2 percent now seems to be the norm, rather than the 3-4 percent increases a while back.
"And in terms of the inflation target, it is difficult to see how a continuation of 2 percent growth in wages is compatible with us achieving the midpoint of the inflation target - 2-1/2 per cent - on a sustained basis," Lowe said.
Australia's headline inflation rate was steady at 1.9 percent in the first quarter of this year from the fourth quarter of last year and the RBA expects inflation to be a bit over 2 percent this year. It targets inflation of 2-3 percent.
In its statement, the RBA said the exchange rate of the Australian dollar had depreciated a little recently but it remains within the range seen over the last two years on a trade-weighted basis.
"An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation that currently forecast," the RBA said, reiterating its recent view.
The Australian dollar has been weakening since late January and fell further today to trade at 1.33 to the U.S. dollar, down 3.8 percent this year.
The Reserve Bank of Australia issued the following statement:
"At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.
The global economy has strengthened over the past year. A number of advanced economies are growing at an above-trend rate and unemployment rates are low. The Chinese economy continues to grow solidly, with the authorities paying increased attention to the risks in the financial sector and the sustainability of growth. Globally, inflation remains low, although it has increased in some economies and further increases are expected given the tight labour markets. As conditions have improved in the global economy, a number of central banks have withdrawn some monetary stimulus and further steps in this direction are expected.
Long-term bond yields have risen over the past six months, but are still low. Equity market volatility has increased from the very low levels of last year, partly because of concerns about the direction of international trade policy in the United States. Credit spreads have also widened a little, but remain low. Financial conditions generally remain expansionary. Conditions in US dollar short-term money markets have, however, tightened over the past few months, with US dollar short-term interest rates having increased for reasons other than the increase in the federal funds rate. This has flowed through to higher short-term interest rates in a few other countries, including Australia.
The price of oil has increased recently, as have the prices of some base metals. Australia's terms of trade are expected to decline over the next few years, but remain at a relatively high level.
The Bank's central forecast for the Australian economy remains for growth to pick up, to average a bit above 3 per cent in 2018 and 2019. This should see some reduction in spare capacity in the economy. Business conditions are positive and non-mining business investment is increasing. Higher levels of public infrastructure investment are also supporting the economy. Stronger growth in exports is expected. One continuing source of uncertainty is the outlook for household consumption, although consumption growth picked up in late 2017. Household income has been growing slowly and debt levels are high.
Employment has grown strongly over the past year, although growth has slowed over recent months. The strong growth in employment has been accompanied by a significant rise in labour force participation, particularly by women and older Australians. The unemployment rate has declined over the past year, but has been steady at around 5½ per cent for some months. The various forward-looking indicators continue to point to solid growth in employment in the period ahead, with a further gradual reduction in the unemployment rate expected. Notwithstanding the improving labour market, wages growth remains low. This is likely to continue for a while yet, although the stronger economy should see some lift in wages growth over time. Consistent with this, the rate of wages growth appears to have troughed and there are reports that some employers are finding it more difficult to hire workers with the necessary skills.
Inflation remains low. The recent inflation data were in line with the Bank's expectations, with both CPI and underlying inflation running marginally below 2 per cent. Inflation is likely to remain low for some time, reflecting low growth in labour costs and strong competition in retailing. A gradual pick-up in inflation is, however, expected as the economy strengthens. The central forecast is for CPI inflation to be a bit above 2 per cent in 2018.
The Australian dollar has depreciated a little recently, but on a trade-weighted basis remains within the range that it has been in over the past two years. An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.
The housing markets in Sydney and Melbourne have slowed. Nationwide measures of housing prices are little changed over the past six months, with prices having recorded falls in some areas. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. APRA's supervisory measures and tighter credit standards have been helpful in containing the build-up of risk in household balance sheets, although the level of household debt remains high.
The low level of interest rates is continuing to support the Australian economy. Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual. Taking account of the available information, 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."
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