Tuesday, July 3, 2018

Australia maintains rate, drops reference to higher AUD

      Australia's central bank left its benchmark cash rate at 1.50 percent for the 23rd meeting in a row and dropped earlier references to the detrimental impact on growth from an appreciation of the Australian dollar in light of the "broad-based appreciation of the US dollar."
       The Reserve Bank of Australia (RBA), which has maintained its rate since August 2016, added that economic growth in the first quarter was consistent with its forecast for growth this year to average "a bit" above 3 percent in 2018 and 2019 as business conditions remain positive and non-mining investment is continuing to increase.
      But RBA Governor Philip Lowe also reiterated that the outlook for household consumption remains a source of uncertainty, with income growing slowly and debt levels high.
      The Australian dollar has been declining since late January against the U.S. dollar and was trading at 1.35 to the U.S. dollar, down 5.2 percent this year.
      Lowe acknowledged this depreciation but added that the Australian dollar still remains within the range that it has been in over the past two years.
      Compared with the start of 2017, the Australian dollar is 2.9 percent higher.
      Australia's Gross Domestic Product grew by an annual 3.1 percent in the first quarter of this year, up from 2.4 percent in the previous quarter.
       In May the RBA forecast growth rising to 3.25 percent by the end of this year and then 3.5 percent by June 2019 before easing to 3.25 percent by December 2019 and 3.0 percent in June 2020.
      Australia's inflation rate has remained below the RBA's target of 2 - 3 percent since early 2015 and was steady at 1.9 percent in the fourth quarter of 2017 and the first quarter of this year.
      In May the RBA forecast headline inflation would rise to 2.0 percent in June and the remain steady at 2.25 percent in December through June 2020. Underlying inflation is seen rising to 2.0 percent by June and then remaining steady at this level for another two years.
       "Inflation is low and is likely to remain so for some time, reflecting low growth in labour costs and strong competition in retailing," Lowe said.
      Last month Lowe said an increase in the cash rate was still some time away as wage growth and consumer prices were tepid.

        The Reserve Bank of Australia issued the following statement:
"At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.
The global economic expansion is continuing. A number of advanced economies are growing at an above-trend rate and unemployment rates are low. The Chinese economy continues to grow solidly, with the authorities paying increased attention to the risks in the financial sector and the sustainability of growth. Globally, inflation remains low, although it has increased in some economies and further increases are expected given the tight labour markets. One uncertainty regarding the global outlook stems from the direction of international trade policy in the United States. There have also been strains in a few emerging market economies, largely for country-specific reasons.
Financial conditions remain expansionary, although they are gradually becoming less so in some countries. There has been a broad-based appreciation of the US dollar. In Australia, short-term wholesale interest rates have increased over recent months. This is partly due to developments in the United States, but there are other factors at work as well. It remains to be seen the extent to which these factors persist.
The recent data on the Australian economy continue to be consistent with the Bank's central forecast for GDP growth to average a bit above 3 per cent in 2018 and 2019. GDP grew strongly in the March quarter, with the economy expanding by 3.1 per cent over the year. Business conditions are positive and non-mining business investment is continuing to increase. Higher levels of public infrastructure investment are also supporting the economy. One continuing source of uncertainty is the outlook for household consumption. Household income has been growing slowly and debt levels are high.
Higher commodity prices have provided a boost to national income recently. Australia's terms of trade are, however, expected to decline over the next few years, but remain at a relatively high level. The Australian dollar has depreciated a little, but remains within the range that it has been in over the past two years.
The outlook for the labour market remains positive. Strong growth in employment has been accompanied by a significant rise in labour force participation. The vacancy rate is high and other forward-looking indicators continue to point to solid growth in employment. A gradual decline in the unemployment rate is expected, after being steady at around 5½ per cent for much of the past year. Wages growth remains low. This is likely to continue for a while yet, although the stronger economy should see some lift in wages growth over time. Consistent with this, the rate of wages growth appears to have troughed and there are increasing reports of skills shortages in some areas.
Inflation is low and is likely to remain so for some time, reflecting low growth in labour costs and strong competition in retailing. A gradual pick-up in inflation is, however, expected as the economy strengthens. The central forecast is for CPI inflation to be a bit above 2 per cent in 2018.
Nationwide measures of housing prices are little changed over the past six months. Conditions in the Sydney and Melbourne housing markets have eased, with prices declining in both markets. Housing credit growth has declined, with investor demand having slowed noticeably. Lending standards are tighter than they were a few years ago, with APRA's supervisory measures helping to contain the build-up of risk in household balance sheets. Some further tightening of lending standards by banks is possible, although the average mortgage interest rate on outstanding loans has been declining for some time.
The low level of interest rates is continuing to support the Australian economy. Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual. Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time."


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