SYDNEY: Australia’s central bank left interest rates at a record low Tuesday with the board upbeat about the economy, while sounding a warning about the strength of the local dollar.
The Reserve Bank has slashed rates by 300 basis points since November 2011 to 1.50 percent as the country wrestles with its transition away from an unprecedented boom in mining investment.
But it has left rates on hold since August last year and is yet to show its hand regarding its next move.
RBA governor Philip Lowe acknowledged that the Australian economy had shrugged off the sluggish start to the year, boosted by government and consumer spending, with growth of 0.8 percent in the June quarter.
“This outcome and other recent data are consistent with the Bank’s expectation that growth in the Australian economy will gradually pick up over the coming year,” he said after a monthly board meeting.
“Over recent months there have been more consistent signs that non-mining business investment is picking up. A consolidation of this trend would be a welcome development.”
But the bank remained concerned about high levels of housing debt in cities where property prices have soared, at a time when wages growth remains low.
It also noted the ongoing strength of the Australian dollar, which was keeping inflation below its target band.
“The higher exchange rate is expected to contribute to continued subdued price pressures in the economy,” said Lowe. “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 dollar fell following the rate announcement, dropping below 78 US cents for the first time since mid-July and remaining at that level by mid-afternoon.
AMP Capital chief economist Shane Oliver said the post-meeting statement “continues to imply a neutral short term bias on interest rates”.
“Basically the RBA and official interest rates remain stuck between a rock and a hard place,” he said.
“Improving global growth, strong business confidence and jobs growth, the RBA’s own expectations for a growth pick up and already high levels of household debt argue against a rate cut.
“But record low wages growth, low underlying inflation, the impending slowdown in housing construction, risks around the consumer and the strong dollar argue against a rate hike.”
Westpac Institutional Bank’s Bill Evans said he expected rates to remain on hold in 2018 and 2019.