The Australian central bank left interest rates unchanged as a stronger global backdrop boosts commodity prices, bringing a windfall to an economy still grappling with weak inflation.
Reserve Bank of Australia Governor Philip Lowe and his board kept the cash rate at 1.5 percent as forecast by 27 of 28 economists — one predicted a cut.
The central bank also reaffirmed its forecasts, predicting the economy to rebound after an unexpected contraction in the third quarter and headline inflation to rise above 2 percent this year.
“The bank’s central scenario remains for economic growth to be around 3 percent over the next couple of years,” Lowe said in his statement. “Growth will be boosted by further increases in resource exports and by the period of declining mining investment coming to an end. Consumption growth is expected to pick up from recent outcomes, but to remain moderate.”
Lowe is relying on record low interest rates, increased resources exports and the end of an unwinding of mining investment that has dragged on growth.
Australia has enjoyed an unexpected jump in iron ore and coal prices that boosts national income, though a concurrent strengthening of the currency is a hindrance for the services sector.
The central bank said an appreciating currency “would” complicate the economy’s adjustment from the mining boom, slightly upgrading the line from the previous “could.”
It also dropped a “somewhat” before its line on labor market indicators being “mixed.”
The central bank noted “considerable variation” in employment indicators across the nation as the mining states of Western Australia and Queensland weakened and the east coast strengthened.
“The forward-looking indicators point to continued expansion in employment over the period ahead,” it said, more positively.
The bank concluded that “taking account of the available information, and having eased monetary policy in 2016, the board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.”
Lowe, since taking charge in mid-September last year has elevated financial stability in an environment of rising asset prices fueled by low interest rates. Inflation remains important, just not the immediate trigger for policy moves that it has been in the past.
The central bank was upbeat on China and the global outlook, forecasting above-trend growth in a number of advanced economies.
“In China, growth was stronger over the second half of 2016, supported by higher spending on infrastructure and property construction,” Lowe said. “This composition of growth and the rapid increase in borrowing mean that the medium-term risks to Chinese growth remain. The improvement in the global economy has contributed to higher commodity prices, which are providing a boost to Australia’s national income.”
The statement also touched on the global reflation theme.
“Headline inflation rates have moved higher in most countries, partly reflecting the higher commodity prices,” it said.
Reflecting the commodity upswing, the Australian dollar climbed more than 5 percent last month and has been strong against the currencies of key trade partners, reducing the economy’s competitiveness.
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