Australia Holds Rates as Lowe Remains Reluctant to Follow Peers

Updated on
  • All economists surveyed expected rate to stay at record low
  • Weak wage growth signals inflation likely to remain subdued

Australia’s central bank kept interest rates unchanged -- as expected -- reinforcing Governor Philip Lowe’s reluctance to follow developed-world counterparts and tighten policy.

Key Quotes

  • “Over recent months there have been more consistent signs that non-mining business investment is picking up,” Lowe said in Tuesday’s statement. “A consolidation of this trend would be a welcome development. Business conditions as reported in surveys are at a high level and capacity utilization has risen. A large pipeline of infrastructure investment is also supporting the outlook. Against this, slow growth in real wages and high levels of household debt are likely to constrain growth in household spending”
  • “Employment has increased in all states and has been accompanied by a rise in labor force participation. The various forward-looking indicators point to solid growth in employment over the period ahead, although the unemployment rate is expected to decline only gradually over the next couple of years”
  • “Wage growth remains low. This is likely to continue for a while yet, although the stronger conditions in the labor market should see some lift in wage growth over time. Inflation also remains low and is expected to pick up gradually as the economy strengthens”
  • The Australian dollar fell, buying 77.99 U.S. cents at 3:05 p.m. in Sydney from 78.18 cents before the decision

State of Play

The currency’s decline following Tuesday’s statement suggests the market is still hunting for signs of an earlier tightening from the Reserve Bank of Australia -- despite Lowe signaling he doesn’t intend to raise rates for some time. Policy makers remain concerned about the level of household debt -- now at a fresh record high of 194 percent -- and weak wage growth and their combined potential to spook consumers into cutting back spending.

Economist Takeaways

  • The RBA is “standing its ground against the hawkish tunes of other central banks,” said David Choi at Aberdeen Standard Investments. “The outlook for Australian household consumption is key. This faces three main headwinds: low wage growth, low consumer confidence and high energy prices. The RBA wants to strike a balance between the low rates required to support lackluster household consumption and guarding the economy from the medium-term risk of unsustainable growth in household debt. Until we see a sustainable pick up in consumption, higher cash rates remain a long way off.”
  • “Until wage growth begins to improve there is no urgency for the Reserve Bank to hike the cash rate,” said Callam Pickering, economist at global job site Indeed, who previously worked at the central bank. “Without a strong contribution from wages, we consider it unlikely that core inflation will push above the lower end of the RBA’s target band of 2-3 percent.”

The Backdrop

Australia has held rates at a record-low 1.5 percent since last August, banking on macroprudential measures to cool scorching Sydney and Melbourne house-price growth and looking for signs that a stronger job market will lift wages. Lowe has made clear he’s in no hurry to follow counterparts moving rates higher, because Australia didn’t have to cut as low or undertake quantitative easing. In the meantime, a stronger currency has proved unhelpful for exporters while signs of higher investment are encouraging.

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