The Reserve Bank of Australia (RBA) kept its interest rate steady for the 11th consecutive month on Tuesday, confirming market expectations and completing a full year without any changes in its monetary stimulus.
The country’s cash rate remained at 1.5 percent amid weak wages and subdued inflation. Several economists believed that rates will be the same for another year as policymakers aim to stabilize the economy.
With inflation figures appearing to be lower than expected and a bounce back in the Australian dollar, these factors might just be suggesting that it is still too early to hike interest rates in Australia.
RBA last cut rates in August 2016, when it decided to trim 25 basis points to avoid the risk of deflation. But, last week’s data showed that the bank is still far from its 2 to 3 percent inflation target.
Inflation rate last quarter was at 1.9 percent which was less than half the rate employees benefitted from a long time ago.
RBA Governor Philip Lowe said that the strength of the Australian dollar may further pressure consumer prices, therefore affecting outlook for growth and employment. It would also cause the progress in economic activity and inflation to be slower than predicted.
The monetary policy statement barely affected the currency against the US dollar, seeing that it gained 0.1 percent to AU$0.8008 in earlier trading. The Aussie is currently trading with a 0.1 percent low to AU$0.7989.
Higher commodity prices, weak US dollar, and the lingering belief that RBA might turn hawkish with its policy, are what keeping the Aussie strong.
Nomura Australia’s executive director Andrew Ticehurst stated that the bank’s comment is quite worrying as it may be indicating that the country’s growth could drop down a fraction.
He added that it will be interesting to see the RBA releases a quarterly report on Friday so they will be able to get new forecasts from them.
RBA is set to present its quarterly statement that day which will provide updates on significant economic indicators including gross domestic product (GDP) and inflation.
Nevertheless, policymakers were optimistic with the labor market after a big two-month full-time job boosted in almost 30 years. They expect unemployment rate would slightly go down over the next couple of years from the current 5.6 percent.
Lowe also hoped that non-mining investment would start to rise and the high level of residential construction would remain stable for some time, but advised that there are still issues going around the retail sector.
While retail sales have recently risen, slow growth in real wages and huge household debt may possibly restrain the increase in spending. Lowe said that growth in housing debt has been beating the sluggish climb in household incomes.
Moreover, RBA is still dealing with problems concerning low rates and property. Sydney and Melbourne house prices have added more than 10 percent over the past year, but low interest rates made an unpredictable frenzy among real-estate investors seeking to trade in tax breaks.
The central bank has supported regulators’ moves to strengthen home-lending standards and prevent the use of interest-only loans by owner –tenants and investors. Nonetheless, Sydney and Melbourne prices rose 1.4 percent and 3.1 percent respectively in July.