(Bloomberg) -- The Reserve Bank of Australia's generally optimistic rate statement Tuesday came laced with a caveat: a brief sentence warning of one thing that could potentially upset its forecasts.
“One continuing source of uncertainty is the outlook for household consumption,” Governor Philip Lowe said Tuesday, days after retail sales posted the weakest three-month stretch in seven years. He added that “inflation is likely to remain low for some time, reflecting the slow growth in labor costs and increased competitive pressures, especially in retailing.”
This is the vicious circle the central bank needs to break. Household debt at a record 194 percent of income; wage growth at lows last seen in Australia's 1991 recession; and firms unable to pass on cost spikes to customers for fear of losing business. Aussies have traditionally been able to inflate their way out of debt with rising incomes, but now appear increasingly skittish about spending cash amid weak household balance sheets and job insecurity.
Read more about Tuesday's interest-rate decision here
Inflation and consumption “represent the key vulnerabilities,” said Sally Auld, JPMorgan Chase & Co.'s head of fixed-income and currency strategy for Australia. “Until policymakers can be confident that the consumer can hold in and the economy is growing at a rate to generate some demand-pull inflation, rate hikes remain a distant prospect.”
Traders have been pushing back their expectations for the RBA's first interest-rate increase and now see it late next year. Yet with consumption accounting for more than half of gross domestic product, the economy needs to generate decent wage growth that boosts spending and pushes up consumer prices before that can happen.
Lowe has two key positives: strengthening employment that should erode some of the job market's slack, and forward-looking indicators of non-mining investment that are “more positive than they have been for some time.”
The RBA releases its updated quarterly growth and inflation forecasts Friday. Lowe repeated on Tuesday that the Australian economy is likely to pick up and average about 3 percent growth over the next few years.
Not everyone is convinced.
“The RBA is too optimistic on consumption and inflation,” said Paul Dales, chief Australia and New Zealand economist at Capital Economics Ltd., who estimates 2.5 percent growth is the best that can be expected in 2018. “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.”
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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