Australia marks two years of rates on hold by standing pat
Australia marked two years since it last moved interest rates by keeping them on hold again Tuesday, with stubborn wage growth and high household debt acting as a drag on spending.
The Reserve Bank of Australia slashed the cash rate from November 2011 to August 2016 to a record low of 1.50 percent to boost the economy as it transitioned away from a mining investment boom.
Governor Philip Lowe said low rates were providing support to the economy, with growth forecast to average “a bit above” three percent this year and in 2019.
“Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual,” he added.
“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.”
Inflation, which came in at 2.1 percent over the past year, should push higher over the next two years, the bank said, although it may first slip in the September quarter.
“Once-off declines in some administered prices in the September quarter are expected to result in headline inflation in 2018 being a little lower than earlier expected, at 1.75 percent,” it said.
The bank has an inflation target of 2–3 percent. Controlling consumer prices helps preserves the value of money and in turn encourages strong and sustainable growth in the economy.
High household debt, sparked by a booming property market that sent prices soaring, and slow wages growth, continue to affect consumer spending even as business conditions and investment improve.
Lowe noted that while debt levels remained high “the rate of wages growth appears to have troughed”.
Westpac chief economist Bill Evans said it was likely rates would remain steady for at least another 12 months.
“Inflation remains low, the housing market is looking quite tenuous and we expect there to be some dislocation in the labour market as we move into an uncertain period next year when we have an election, expected to be in May,” he said.
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