Sluggish wage growth keeps Australia rates on hold

Australia's central bank kept interest rates at a record low Tuesday, with the board maintaining a neutral policy bias as wage growth remains stubbornly low and inflation below target
AFP

Sydney (AFP) – Australia’s central bank kept interest rates at a record low Tuesday, with the board maintaining a neutral policy bias as wage growth remains stubbornly low and inflation below target.

The Reserve Bank of Australia has not adjusted rates since August 2016, following a series of cuts from November 2011 that took it to 1.50 percent in a bid to boost non-mining sectors of the economy.

Its decision to stay on hold followed data last month showing that while the economy added 17,500 jobs in February, it was against an expected 20,000 increase.

Policy makers are banking on continued low interest rates and rising investment to drive hiring and gradually encourage wage growth.

“The various forward-looking indicators continue to point to solid growth in employment in the period ahead, with a further gradual reduction in the unemployment rate expected,” said central bank governor Philip Lowe.

“Notwithstanding the improving labour market, wages growth remains low. This is likely to continue for a while yet, although the stronger economy should see some lift in wages growth over time.”

Inflation also remains below target, and the Australian dollar too high, despite solid business conditions, meaning the decision to not move was widely expected.

“The low level of interest rates is continuing to support the Australian economy,” said Lowe.

“Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual.”

Given this, 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”.

Underlying or core inflation — which strips out volatile items and is closely watched by the central bank — is at an annual 1.9 percent, just below the RBA’s target band of 2.0-3.0 percent.

March quarter inflation statistics are due later this month.

The monetary statement was the first since data showed economic growth lifted by 0.4 percent in the fourth quarter last year, down from a revised 0.7 percent in the previous three months.

That gave an annual growth rate of 2.4 percent, slightly below the central bank’s forecasts.

Lowe said the bank expected it to pick up in 2018.

“Business conditions are positive and non-mining business investment is increasing. Higher levels of public infrastructure investment are also supporting the economy,” he said.

But a continuing source of uncertainty was the outlook for household consumption, with household incomes growing slowly and debt levels high.

TD Securities’ Annette Beacher said the consensus was that rates would remain at 1.5 percent into 2019 and “hence the tone of these monthly statements are not expected to change for some time”.

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