Australia’s 15th interest-rate pause sees it drift from peers

Governor is in no rush to follow the US, Canada and the UK in tightening, with some of his Asian peers forecast to hike next year


SYDNEYAustralia’s central bank kept its benchmark interest rate unchanged and signalled no plans to move in the near term, even as developed economy counterparts shift toward withdrawing stimulus.

The Reserve Bank of Australia (RBA) yesterday left the key rate at 1.5% for a 15th meeting, matching its previous record, in what was also the last gathering for the year. Governor Philip Lowe has made clear he’s in no rush to follow the US, Canada and the UK in tightening, with some of his Asian peers forecast to follow South Korea and hike next year.

“We believe the RBA would like to see a sustained lift in wages growth before lifting rates, which leaves any policy adjustment off the table for some time,” said Daniel Blake, an interest-rate strategist at Morgan Stanley in Sydney. “This puts the RBA out of sync not just with the US Federal Reserve, but with an emerging Asian tightening cycle.”

The RBA’s low rates have lifted business conditions and encouraged firms to hire and invest, but households that loaded up on debt to buy property are struggling with low wage growth to meet repayments and keep spending. Lowe signalled that, following a burst of hiring this year, there were some reasons for optimism about wage pressures that have been missing Down Under.

“There are reports that some employers are finding it more difficult to hire workers with the necessary skills,” Lowe said in a statement. “However, wage growth remains low. This is likely to continue for a while yet, although the stronger conditions in the labour market should see some lift in wage growth over time.”

Lowe said the economy likely grew at around its “trend rate” over the year to the third quarter (3Q). Australia expanded 0.7% in the three months through September and 3% from a year earlier, economists predict ahead of data out yesterday. Treasury estimates a speed limit of about 2.75%.

The governor also maintained his recent confidence in the trajectory of investment.

“The outlook for non-mining business investment has improved further, with the forward-looking indicators being more positive than they have been for some time,” Lowe said. “One continuing source of uncertainty is the outlook for household consumption. Household incomes are growing slowly and debt levels are high.”

Since the board last convened, the Aussie dollar is little changed; 3Q data showed wage growth remained in the doldrums; another month of strong full-time hiring saw unemployment drop to 5.4%, the lowest in more than four years; and iron ore, Australia’s biggest export, has climbed 20% from a low in late October.

The RBA chief noted the currency has traded within its range of the past two years, while adding: “an appreciating exchange rate would be expected to result in a slower pickup in economic activity and inflation” than the bank currently forecasts. The local dollar edged slightly higher after the release to trade at 76.5 US cents (RM3.11) at 4:44pm in Sydney yesterday.

What our economists say Tamara Henderson: The RBA is still focused on the Aussie, even though the currency has been on a weaker trend versus trading partners since July and 3Q growth probably reverted to trend. The reiteration of its warning about the risks of a higher currency suggest it’s potentially trying to head off a rally in the event of a strong gross domestic product result.

The International Monetary Fund last month acknowledged that tepid wage growth meant the RBA may need to extend its rate pause for another 12 months. In contrast, the Organisation for Economic Cooperation and Development urged policymakers to raise rates in the second half of 2018 as the pickup in wages and prices becomes more entrenched.

Money markets see little chance of a rate increase before December 2018 and the median estimate of economists is for tightening to begin in the 4Q of next year. — Bloomberg