Australia’s central bank kept interest rates unchanged and warned a rising currency is expected to subdue inflation and weigh on the outlook for growth and employment.
The Australian dollar has surged more than 11 percent this year, hampering the Reserve Bank’s efforts to transition the economy to growth led by exports like education and tourism. That prompted Governor Philip Lowe to end 16 months of gentle cautioning that a rising exchange rate could merely “complicate” the handover.
“The higher exchange rate is expected to contribute to subdued price pressures in the economy,” Lowe said in his statement, the longest since 2013. “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 bank would be particularly concerned if the Australian dollar remains stubbornly high, should the terms of trade decline as the bank is currently expecting,” said Paul Brennan, chief economist for Australia at Citigroup Inc.
Lowe and his deputy, Guy Debelle, began to ramp up their rhetoric on the Australian dollar last month and have elevated the negative impact of its strength. Still, policy makers showed renewed confidence in the labor market – following the biggest two-month full-time job gains in almost 30 years – predicting that the jobless rate would “decline a little” over the next couple of years from the current 5.6 percent.
“The commentary around the labor market is still somewhat cautious despite consistently strong employment numbers,” said Bill Evans, chief economist at Westpac Banking Corp. in Sydney. “That is because concerns around wages growth remain, with the damaging feedback loop from low wages growth to weak consumption and business investment being of paramount concern.”
The RBA reiterated that wage growth remains low and will likely be so for some time yet. That, together with new entrants in the retail industry – read Amazon.com – are likely to keep inflation subdued, notwithstanding sharp electricity price increases.
The RBA has kept rates unchanged for a year and refrained from joining global counterparts in signaling plans to withdraw stimulus amid concern about weak wages and tepid inflation. Its easing cycle began in late 2011 and was designed to cushion a transition away from mining to services and manufacturing, encouraging firms to hire and invest.
“The low level of interest rates is continuing to support the Australian economy,” Lowe said in his concluding paragraph.
But the RBA still faces a problem with low rates and property. The Sydney and Melbourne housing markets have shown bubble characteristics. While low interest rates encouraged construction and the hiring of former miners, they unleashed a speculative frenzy among real-estate investors looking to cash in on tax breaks.
The central bank has supported regulators’ moves to strengthen home-lending standards and discourage the use of interest- only loans by owner-occupiers and investors. Still, Sydney and Melbourne prices climbed 1.4 percent and 3.1 percent respectively in July. Michael Heath, Bloomberg
