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Australia Will Start Raising Rates Later This Year: OECD

  • Higher household incomes should mitigate risks from high debt
  • Unexpectedly big falls in house prices could hurt consumption

Commuters in Sydney

Photographer: Dallas Kilponen/Bloomberg

Australia will begin raising interest rates toward the end of this year as wages rise and inflation quickens, the OECD said in a report.

The Reserve Bank of Australia has kept interest rates unchanged at a record-low 1.5 percent since 2016 to support growth and hiring. Policy makers expect that as unemployment falls toward 5 percent, employers will need to pay more to attract workers and prices will rise. However, weaker data of late has prompted some economists to push back expectations of a rate increase into next year and markets see little chance of one before mid-2019.

“Withdrawal of stimulus is projected to begin towards the end of 2018, as wage and price growth are expected to pick up further on account of a continued strengthening of activity and labor market performance,” the Organisation for Economic Co-operation and Development said in its 2018 outlook Wednesday. “The resulting boost to household incomes should mitigate risks associated with Australia’s very high household indebtedness.”

The Paris-based group sees “robust” economic growth of 2.9 percent this year, accelerating to 3 percent next year, and unemployment declining to 5.4 percent and 5.3 percent, respectively. It expects exports and investment to support the expansion, while consumption growth will be “more subdued.” The OECD says strong global commodity markets “remain an important source of income gains and growth, but also of uncertainty and risk.”

It also warns that China’s slowdown and rebalancing of its economy could prove to be a larger drag than expected. Australia is the world’s most China-dependent developed economy.

The report also focused on high household debt, noting that any “unexpectedly large corrections” in house prices could reduce household wealth, cut consumption and damage the construction industry.

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