Australia yesterday kept interest rates at a record low, as it has for the past two years, while a currency sliding toward US$0.70 offers the prospect of additional stimulus for the economy.
As expected, Reserve Bank of Australia (RBA) Governor Philip Lowe left the cash rate at 1.5 percent, a stance he expects would eventually tighten the labor market and spur enough wage growth to speed up inflation.
While the Australian dollar’s more than 10 percent drop since February might help quicken the process, there is a risk that rising mortgage rates and falling property prices could encourage households to put away their wallets.
“One continuing source of uncertainty is the outlook for household consumption,” Lowe said in a statement after the decision. “Household income has been growing slowly and debt levels are high.”
On the exchange rate, Lowe said: “It has depreciated against the US dollar along with most other currencies.”
The RBA has said its next rate move is more likely to be up than down; Lowe, since taking the helm in September 2016, has been reluctant to cut further, given the diminishing returns from easier policy.
However, the RBA’s stimulus was eroded somewhat, when Westpac Banking Corp last week said it was hiking its key mortgage rate by 14 basis points, more than half a typical RBA increase, to compensate for higher offshore funding costs.
That prompted traders to push out their bets for the bank’s first rate hike since 2010 and drive down the currency.
Many analysts now see the Australian dollar dropping into the 60s, potentially boosting the competitiveness of exporters and import-competing industries, and allowing them to take on more staff.
The Aussie dollar would probably need to fall into the 60s for a sustained period — potentially almost a year — to change the RBA’s calculations.
“The RBA retained its outlook for growth and inflation, shrugging off heightened trade tensions between the US and China, and a sharp slide in the Aussie dollar,” Bloomberg economist Tamara Mast Henderson said.
“Importantly, the central bank still expects the pick-up in wage growth to be a gradual process. We think the RBA will remain on hold through most, if not all, of next year,” Henderson added.
The central bank does not see unemployment falling to the 5 percent level generally associated with faster wage growth until December 2020. The jobless rate is currently 5.3 percent.
Australia is also on track for a change in government in the first half of next year to a less business-friendly administration. The Labor Party might dilute the current government’s income tax reductions that — in an environment of stagnant wages — are one of the few options available to boost household incomes.
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