(Bloomberg) -- Australia's central bank chief Philip Lowe reinforced that a return of rapid wage growth remains a distant prospect despite strengthening business investment and a hiring bonanza.
The governor kept interest rates unchanged at 1.5 percent Tuesday, as expected, saying in a statement: “notwithstanding the improving labor market, wage growth remains low. This is likely to continue for a while yet.”
Rapid population growth and a jump in workforce participation has prevented the hiring boom from cutting deeply into the jobless rate and sparking wage gains and inflation. The Reserve Bank of Australia has opted to be a steadying influence on the economy, keeping rates at a record-low for 18 months to encourage firms to expand and take on new employees, a strategy that's paying some dividends.
“The low level of interest rates is continuing to support the Australian economy,” Lowe said in his statement. “Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual.”
Justin Fabo, an economist at Macquarie Bank Ltd., said that including the word “gradual” was key, and “a timely reminder from the bank that the cash rate is going nowhere anytime soon.”
The Australian dollar reflected that view, edging down to 78.41 U.S. cents at 3:41 p.m. from 78.72 prior to the decision. Traders see a 68 percent chance of a rate rise in December, a slight reduction from last week.
Lowe's determination to show patience has him cutting an increasingly isolated figure in the developed world as global counterparts either consider or start to remove stimulus in response to an upswing in economic growth.
The RBA chief's main concern, as he set out again Tuesday, is uncertainty over the consumer. “Household incomes are growing slowly and debt levels are high,” he noted.
Still, the central bank-- which releases its quarterly update of growth and inflation forecasts Friday -- said its expectation is for economic expansion to accelerate to above 3 percent over the next couple of years. It added that data over summer was consistent with that view.
Policy makers also remain upbeat on the labor market, noting forward indicators continue to point to solid growth, “with a further gradual reduction in the unemployment rate expected.” It currently stands at 5.5 percent.
But inflation is likely to remain low “for some time,” Lowe added, reflecting limited pay rises and tougher retail competition. Amazon.com Inc. opened in Australia last year and its growing footprint could see deflation in the industry. The RBA aims for consumer-price growth of between 2 percent and 3 percent, and both headline and core inflation are below the bottom of that band.
Consumption “is unlikely to do the heavy lifting for GDP this year,” said Sally Auld at JPMorgan Chase & Co. “While other parts of the economy have firmed, particularly capex, our view is that the net outcome will still be sub-trend growth, inflation below target and an unemployment rate above” full employment, she said.
To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net.
To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Chris Bourke
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