Wed, Jul 05, 2017 - Page 10 News List

Australia holds rates as economy remains soft


A round-the-clock free kitchen for the homeless is pictured in front of the Reserve Bank of Australia in Sydney’s central business district yesterday.

Photo: AFP

Australia’s central bank yesterday held interest rates at a record low, as the economy endures a soft patch while wage growth stutters, shunning indications of a move to tighter monetary policy elsewhere.

The Reserve Bank of Australia (RBA) has sat on the sidelines since August last year, having cut borrowing costs 300 basis points since November 2011 to support the economy as an unprecedented mining investment boom ends.

“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 RBA’s neutral stance disappointed analysts, who had tipped a more hawkish outlook in line with other recent statements from central banks in Canada and Britain.

“I think they are just acknowledging that they see the risks as balanced,” JPMorgan economist Henry St John said, citing an improving labor market and varied housing market conditions across the nation.

“Our view is that we might see some further deterioration in the activity data, and that would cause them to shift to a more dovish stance,” he said.

While Australia marked 26 years without a recession after the economy grew 0.3 percent quarter-on-quarter in January to March, the 1.7 percent annual rate of expansion was the weakest since 2009.

The nation is also experiencing slow growth in wages and household income, underemployment and high levels of household debt, fuelling speculation that rates will remain unchanged for some months.

Lowe acknowledged the slowdown in economic growth, but said it was “partly reflecting temporary factors.”

“The Australian economy is expected to strengthen gradually, with the transition to lower levels of mining investment following the mining investment boom almost complete,” he said.

A booming housing market, particularly in Sydney and Melbourne, has also made further interest rate cuts appear less likely, economists said, while macro-prudential tools have been used to tighten lending, particularly to investors.

“There was nothing in today’s statement to shift our view that rates will stay on hold for some time,” Commonwealth Bank of Australia economist Kristina Clifton said in a note.

Clifton added that while economic growth was expected to lift by next year, a sizable part of it would come from higher liquefied natural gas production, which is not expected to generate much employment or inflation.

The RBA said in May that increases in underlying inflation over the next year or two would be “quite gradual” because of low wages growth.

“We need to see the RBA lift these inflation forecasts materially before rate rises are back on the table anytime soon,” Clifton added.

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