Wed, Mar 07, 2018 - Page 10 News List

Reserve Bank of Australia leaves rates unchanged

Bloomberg

Australia’s central bank yesterday left interest rates unchanged as its increasing policy divergence from global peers weighs on the currency, potentially aiding economic growth and inflation.

Reserve Bank of Australia (RBA) Governor Philip Lowe and his board kept the cash rate at a record-low 1.5 percent, in line with market and economists’ expectations.

They are trying to prolong a hiring boom and soak up spare capacity in the labor market to generate faster wages growth.

“The low level of interest rates is continuing to support the Australian economy,” Lowe said in a statement announcing the decision. “Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual.”

The local dollar was little changed at US$0.7779 at 2:34pm in Sydney.

The RBA is standing pat as developed world peers move to normalize policy or raise interest rates in response to tighter job markets and accelerating growth, as they overcome fallout from the 2008 global recession.

While Australia dodged the slump due to massive resource demand from an industrializing China, its economy is sluggish now due to record-high household debt and weak wage growth that have slowed consumption and inflation.

Australian bonds are yielding less than their US counterparts for the first time since around the turn of the century, which is starting to weigh on the currency.

The Aussie has fallen about 1.5 percent in the past month, though continued support from stronger commodity prices is likely to prevent a sharp drop. In February 2001, it traded below US$0.48, but that reflected weak terms of trade as well as rate differentials.

Westpac Banking Corp chief economist Bill Evans forecasts that the US federal funds rate would climb to 112 basis points above the RBA’s cash rate next year.

He expects the US Federal Reserve to raise it to 2.625 percent next year, while Lowe and his board remain on hold until 2020.

“On a trade-weighted basis, the Australian dollar remains within the range that it has been in over the past two years,” Lowe said. “An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.”

Australia’s GDP for the final quarter of last year is due for release tomorrow. It probably slowed after a slump in exports over the period, with coal shipments hampered by poor weather and related issues.

At the same time, the RBA’s easy policy has encouraged business investment and spurred a hiring bonanza as 400,000 new jobs were added last year, a record three-quarters of which were full-time.

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