Australia Maintains Record Low Interest Rate

Alicia Cross
August 1, 2017

Australia's central bank kept interest rates unchanged and warned that a rising currency is expected to subdue inflation and weigh on the outlook for growth and employment.

In Tuesday's rates decision for August, which saw no change, RBA governor Philip Lowe wrote that the stronger currency was hurting workers and constraining economic activity.

However, currency appreciation is somehow tightening the economy.

Wage growth remains subdued in most countries, as does core inflation.

More recently, the USA dollar has lost ground as investors have concluded that the U.S. central bank won't raise rates again this year because of feeble United States inflation. "Financial markets indicate the cash rate won't rise until late 2018", Lawless said.

The Australian economy is benefiting from a more benign global backdrop, as stronger growth in a number of major economies is helping to buoy commodity prices. The transition to lower levels of mining investment following the mining investment boom is nearly complete, with some large LNG projects now close to completion.

But with Australia's economy grappling with soft wages growth and high household debt, hurting consumer spending, the Reserve Bank stepped up its rhetoric against the local dollar.

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The US dollar has struggled recently, boosting the so-called Aussie, with the Federal Reserve's tepid inflation outlook fuelling speculation there would be no more American rate cuts this year. Wage growth low and likely to continue like that for a while. Some think the bank will express some concern about its recent strength while others believe it'll maintain the status quo.

There is also likely to be a short-term pick up in inflation, as measured by the consumer price index, as higher electricity and tobacco prices flow through. A factor working in the other direction is increased competition from new entrants in the retail industry. A strong report would likely bolster the currency, though USA figures remain in sharp focus.

"The higher exchange rate is expected to contribute to subdued price pressures in the economy", he said.

"It is also weighing on the outlook for output and employment."
Despite the bank's forecasts about Australian economic growth remaining optimistic, as employment opportunities, consumer confidence, and business conditions are continuously improving, RBA members are anxious about the inflation outlook. In other markets, prices are declining.

"In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years", Lowe said. "We expect interest rates to remain on hold in the short to medium term". Lowe said that growth in housing debt has been beating the sluggish climb in household incomes.

In July, the bank said the Australian economy "is expected to strengthen gradually, with the transition to lower levels of mining investment following the mining investment boom nearly complete".

"Taking account of the available information, 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", the RBA said in its statement.

Other reports by Free-Prsite

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