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Australia holds interest rates as economy remains soft

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Australia’s central bank held interest rates at a record low Tuesday 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 has sat on the sidelines since August, 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. The Australian dollar slipped almost half a US cent to US$0.7638.

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

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

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

The country 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 a further cut in rates 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.

She added that while economic growth was expected to lift by 2018, a sizable part of it would come from higher liquefied natural gas (LNG) production, which is not expected to generate much employment or inflation.

The RBA also said in May that increases in underlying inflation — which strips out volatile items — 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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