(Bloomberg) -- Australia's central bank showed increasing confidence in the investment picture outside mining while retaining concerns about the prospects for household spending as it kept interest rates at a record-low 1.5 percent.
Key Quotes
- “The bank's forecasts for growth in the Australian economy are largely unchanged,” Governor Philip Lowe said in a statement Tuesday. “The outlook for non-mining business investment has improved, with the forward-looking indicators being more positive than they have been for some time.”
- “One continuing source of uncertainty is the outlook for household consumption. Household incomes are growing slowly and debt levels are high.”
- “Wage growth remains low. This is likely to continue for a while yet, although the stronger conditions in the labor market should see some lift in wage growth over time.”
- “In underlying terms, inflation is likely to remain low for some time, reflecting the slow growth in labour costs and increased competitive pressures, especially in retailing.”
- Australian dollar buys 76.85 U.S. cents at 3:19 p.m. in Sydney compared with 76.81 before the decision
State of Play
The Reserve Bank of Australia is betting on a strengthening labor market to eventually drive wage gains and faster inflation, underscoring the likelihood that rates will be on hold for some time yet. Consumption remains a sore point -- particularly after retail sales posted the weakest three-month stretch in seven years -- as policy makers fear highly indebted households struggling with record-low wage growth will be spooked out of spending. Consumption accounts for more than half of gross domestic product.
Economist Takeaways
- “The surge in jobs growth has not offset the downward pressure on household income from record low wage growth, rapidly rising utility prices and the burden of high debt,” said Paul Dales at Capital Economics. “A slowdown in the annual rate of consumption growth next year is one of the main reasons why GDP growth of 2.5% is the best that can be expected for 2018 rather than the RBA's forecast of around 3%.”
- “The RBA has significant scope to maintain a ‘steady as she goes' approach,” said Justin Fabo at Macquarie Bank. “Importantly, this allows the Bank to observe the implications of higher interest rates in some other developed economies, including those with high household leverage, such as the U.K. and Canada.”
The Backdrop
The Reserve Bank of Australia has held rates for more than a year as it relied on macro-prudential measures to cool scorching east-coast property markets. With house-price gains now slowing, Lowe will want to see economic growth speed up and spare capacity in the jobs market decline before moving to hike. The governor has made clear he's in no hurry to follow peers and tighten, as Australia didn't have to cut as low or undertake quantitative easing.
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, Victoria Batchelor
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