Photographer: Brendon Thorne/Bloomberg

Australia's Central Bank Holds Key Interest Rate Steady

  • Tuesday’s decision was forecast by all 27 economists surveyed
  • Resurgent Aussie dollar has climbed more than 10% this year

Australia’s central bank held interest rates, remaining on the sidelines as lending curbs take steam out of east-coast housing markets and as prospects for a pickup in business investment emerge.

Key Quotes

  • “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,” Governor Philip Lowe and his board said after leaving the cash rate at 1.5 percent Tuesday, as expected by markets and economists. “The outlook for non-mining investment has improved recently and reported business conditions are at a high level.”
  • “Housing prices have been rising briskly in some markets, although there are signs that conditions are easing, especially in Sydney,” Lowe said in the statement. “Residential construction activity remains at a high level, but little further growth is expected.”
  • “Wage growth remains low,” he said. “This is likely to continue for a while yet, although stronger conditions in the labor market should see some lift in wages growth over time.”

State of Play

The currency edged a little lower following the decision as the Reserve Bank of Australia gave little sign of a hawkish tilt following a raft of stronger economic data. Yet Lowe himself last month said it was reasonable for markets to expect that the next move in rates will be up, albeit a long way off. The hurdle to stronger sustained growth remains high levels of household debt and slow real wage growth, as the governor outlined in Tuesday’s statement.

Economist Takeaways

  • “There were a few evolutions in the accompanying statement -- relative to last month -- which were generally in a marginally hawkish direction,” said Adam Boyton at Deutsche Bank AG. “We remain less convinced that ‘stronger conditions in the labour market should see some lift in wages growth’.”
  • “Governor Lowe has now completed his first year in office with a constant cash rate over the period,” said Michael Blythe at Commonwealth Bank of Australia. “We suspect another year of masterly inactivity is in store from here.”
  • “The RBA makes the point that growth in housing debt continues to outpace slow growth in household incomes, so leverage ratios in the household sector are yet to stabilize,” said Sally Auld at JPMorgan Chase & Co. “We would read this as a signal that concern around the state of household balance sheets continues to act as a binding constraint on the policy rate.”

The Backdrop

The RBA has kept rates unchanged since last August, refraining from joining global peers in signaling plans to withdraw stimulus amid concern about weak wages and tepid inflation. Its prior easing cycle was designed to cushion a transition to services and manufacturing and away from mining, by encouraging firms to hire and invest. While the labor market has strengthened this year, there’s been little movement on spending until last week’s capex data signaled some improvement.

Other Details

  • On the Aussie dollar’s strength, Lowe reiterated the currency “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”
  • Concerns on consumption -- which accounts for about 55 percent of GDP -- remain key with wage growth still at record lows, soaring energy bills and high household debt
  • Iron ore has rebounded in recent weeks as mills in China benefit from the government shuttering capacity, helping absorb increased ore supplies from Australia. Lowe noted that “commodity prices have risen recently, although Australia’s terms of trade are still expected to decline over coming years”

— With assistance by Kimberley Painter

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