Australia holds rate, repeats high AUD to dent growth

September 5, 2017

By CentralBankNews.info
Australia’s central bank kept its benchmark cash rate at 1.50 percent, as widely expected, and repeated last month’s comment that a rise in the exchange rate of the Australian dollar “would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.”
But the Reserve Bank of Australia (RBA), which has maintained its rate since cutting it in August 2016, also said recent economic data was consistent with its expectation the country’s growth would gradually pick up over the coming year.
A steady strengthening of the Australian dollar since May came to a halt in the last month following the RBA’s previous meeting on Aug. 1 when it ratcheted up its warning about the detrimental impact that a stronger currency would have on economic activity and inflation.
In today’s statement RBA Governor Philip Lowe repeated the rise in the Australian dollar, known as the Aussie, partly reflected the decline in the U.S. dollar but this rise would contribute to subdued price pressures and weigh on the outlook for output and employment.
Lowe’s comment about the Aussie today and last month went beyond earlier statements that said a higher exchange rate would “complicate” the adjustment from booming mining investment.
Today the Aussie was trading at 1.26 to the U.S. dollar, largely unchanged since Aug. 1 but still up 10 percent this year.
“The decline in mining investment will soon run its course,” Lowe said, adding the outlook for non-mining investment had improved and business conditions are at a high level, with retail sales picking up.
But growth in real wages remains slow and high household debt is likely to restrain the rise in future spending, he added.
Last month the RBA said the country’s economy is expect to grow at a rate of around 3 percent in coming years. This forecast was not repeated today.
Australia’s Gross Domestic Product grew by 0.3 percent in the first quarter of this year from the fourth quarter of last year for annual growth of 1.7 percent, down from 2.4 percent.
A deceleration in Australia’s inflation rate to 1.9 percent in the second quarter of this year from 2.1 percent in the first quarter reflect a decline in oil prices but inflation still remains higher than the 1.0 percent seen in the second quarter of 2016.
Lowe confirmed that he still expects inflation to pick up gradually as the economy strengthens.
On Aug. 11 Lowe told parliament’s economics committee that he expects to keep interest rates at record lows for a while yet and any tightening is some time away and likely to be gradual to give households time to reduce their debt.
Australia’s household debt-to income ratio is at a record high of 190 percent and rising faster than incomes.

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.

Conditions in the global economy are continuing to improve. Labour markets have tightened further and above-trend growth is expected in a number of advanced economies, although uncertainties remain. Growth in the Chinese economy is being supported by increased spending on infrastructure and property construction, with the high level of debt continuing to present a medium-term risk. Commodity prices have risen recently, although Australia’s terms of trade are still expected to decline over coming years.

Wage growth remains low in most countries, as does core inflation. Headline inflation rates have declined recently, largely reflecting the earlier decline in oil prices. In the United States, the Federal Reserve expects to increase interest rates further and there is no longer an expectation of additional monetary easing in other major economies. Financial markets have been functioning effectively and volatility remains low.

The recent data have been consistent with the Bank’s expectation that growth in the Australian economy will gradually pick up over the coming year. The decline in mining investment will soon run its course. The outlook for non-mining investment has improved recently and reported business conditions are at a high level. Residential construction activity remains at a high level, but little further growth is expected. Retail sales have picked up recently, although slow growth in real wages and high levels of household debt are likely to constrain future growth in spending.

Employment growth has been stronger over recent months and has increased in all states. The various forward-looking indicators point to solid growth in employment over the period ahead. The unemployment rate is expected to decline a little over the next couple of years.

Wage growth remains low. This is likely to continue for a while yet, although stronger conditions in the labour market should see some lift in wages growth over time. Inflation also remains low and is expected to pick up gradually as the economy strengthens.

The Australian dollar has appreciated over recent months, partly reflecting a lower US dollar. The higher exchange rate is expected to contribute to the subdued price pressures in the economy. It is also weighing on the outlook for output and employment. An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.

Conditions in the housing market continue to vary considerably around the country. Housing prices have been rising briskly in some markets, although there are signs that conditions are easing, especially in Sydney. In some other markets, prices are declining. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. Rent increases remain low in most cities. Investors in residential property are facing higher interest rates. There has also been some tightening of credit conditions following supervisory measures to address the risks associated with high and rising levels of household indebtedness. Growth in housing debt has been outpacing the slow growth in household incomes.

The low level of interest rates is continuing to support the Australian economy. 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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Australia holds rate, repeats high AUD to dent growth