SYDNEY: Australia’s central bank held interest rates at a record low Tuesday, as it warned that a strengthening local currency was hurting activity in an already soft domestic economy.
The Reserve Bank of Australia has held rates at 1.50 percent for a year, after cutting them by 300 basis points since late 2011 to boost an economy transitioning away from a dependence on mining following an unprecedented investment boom.
“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,” RBA governor Philip Lowe said in a statement.
The US dollar has struggled recently, boosting the so-called Aussie, with the Federal Reserve’s tepid inflation outlook fuelling speculation there would be no more American rate cuts this year.
But with Australia’s economy grappling with soft wages growth and high household debt, hurting consumer spending, the Reserve Bank stepped up its rhetoric against the local dollar.
“The higher exchange rate is expected to contribute to subdued price pressures in the economy,” Lowe warned.
“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.”
The stronger language failed to move the currency, with the Australian dollar little changed at about 80 US cents. The local unit was trading around 76.4 US cents when the RBA released its last rate decision in early July.
“We did indeed get some fairly significant change,” Westpac Bank FX Strategy head Robert Rennie told AFP of the change in the RBA’s currency comments after 15 meetings.
“When a central bank tells you that an appreciating exchange rate could be expected to result in a slower pick-up in economic activity or inflation, then you begin to think, ‘What are their forecasts?’”
The RBA will release its latest economic forecasts Friday, with Rennie expecting a possible modest downgrade to the current outlook of annual growth increasing to a little over three percent.
The central bank is having to balance a booming housing market that favours a rate hike against an uncertain consumption outlook, which supports a cut.
Commonwealth Bank of Australia’s chief economist Michael Blythe said the prospect of a hike was “unlikely before late 2018”.
“The RBA last pulled the policy lever in August 2016 — a year ago. We suspect another year of masterly inactivity is in store from here,” Blythe said in a note.