Aussie dollar dips as RBA holds interest rate at 1.5%

Central bank's move follows weak wage rise, high household debt

SYDNEY • Australia's central bank failed to join global counterparts in talking up policy tightening, with governor Philip Lowe instead reiterating concerns that record household debt and weak wage growth leave consumption vulnerable.

While speculation gathered in currency markets that the Reserve Bank of Australia (RBA) would follow the Bank of England and Bank of Canada in taking a hawkish turn, the last thing Mr Lowe would have wanted is to trigger a currency surge. The RBA is traditionally comfortable with failing to meet market expectations, and yesterday left its cash rate at 1.5 per cent.

Mr Lowe did show some optimism: Business conditions have improved, capacity utilisation has increased, and business investment has picked up in areas of Australia unaffected by mining. In addition, resource-orientated regions are almost through the multi-year unwinding of investment, he said.

But it was the RBA chief's references to household debt, which has climbed to a new record, that were most noticeable.

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"Growth in housing debt has outpaced the slow growth in household incomes," he said, adding that recent lending curbs from the bank regulator "should help address the risks associated with high and rising levels of household indebtedness".

Mr Lowe again pointed to the mixed nature of the nation's labour market - a key indicator. While the last three monthly reports have shown strong hiring gains and unemployment has dropped to 5.5 per cent from 5.9 per cent, underemployment remains high.

There is still plenty of slack in the labour market and this is the epicentre of any turnaround in wages - which are increasing at the slowest pace on record.

The central bank said that wage growth is likely to remain low for a while yet. Core inflation remains below the central bank's 2 per cent to 3 per cent target and is only forecast to "increase gradually" as the economy strengthens. 

Said Ms Sally Auld, head of fixed income and currency strategy for Australia at JPMorgan Chase: "The RBA has explicitly chosen not to adopt a more hawkish tone.

"Ultimately, a more hawkish central bank requires the distribution of risks around both growth and inflation to have improved, such that the current setting of financial conditions is no longer appropriate. Our sense is that this is not yet the case in Australia."

Keeping interest rates relatively low remains important - not just to cushion the transition away from mining investment, but to try to stimulate businesses to borrow and invest, and in turn, hire.

Mr Lowe again warned that an appreciating currency would complicate the economy's adjustment - which is why any observers who were expecting a hawkish turn had put hope above experience.

The Aussie dollar dropped more than half a US cent to 76.18 US cents at 4.45pm local time yesterday after the RBA failed to adopt a hawkish stance.

Against the Singdollar it was trading at 95.27 Australian cents.

Three-year government bond yields fell six basis points to 1.96 per cent, their biggest decline since March.

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A version of this article appeared in the print edition of The Straits Times on July 05, 2017, with the headline 'Aussie dollar dips as RBA holds interest rate at 1.5%'. Print Edition | Subscribe