Australia sees faster growth, fewer jobless as key rate held

As economic growth strengthens and unemployment falls, progress will gradually be made on inflation

By BLOOMBERG

SYDNEY • Australia’s central bank raised its economic growth forecast while keeping its key interest rate unchanged, reflecting little signs of a turn up in inflation.

Reserve Bank of Australia (RBA) governor Philip Lowe said the economy was “performing well” and predicted growth will average 3.5% this year and next, while the jobless rate would drop to 4.75% in 2020 from its current level of 5%. But, Lowe added bluntly that wages growth remained low.

“The path towards the RBA’s first rate hike in eight years remains murky,” said an economist who previously worked at the RBA. “Underlying inflation fell short of expectations in the September quarter, having now fallen short of the RBA’s target for almost three years, while wage growth remains terribly disappointing.”

Lowe reiterated that as economic growth strengthens and unemployment falls, progress will gradually be made on inflation. But his scenario is at risk from falling property prices, which in Sydney are down almost 10% from July last year. That could prompt households to retrench and instead boost their savings in an environment of stagnant incomes.

Lowe left the cash rate at a record-low 1.5% yesterday, as he has since taking the helm at the RBA more than two years ago. The governor repeated that the outlook for household spending remains uncertain and noted that Sydney and Melbourne property prices have continued to ease.

“Growth in credit extended to owner-occupiers has eased but remains robust, while demand by investors has slowed noticeably as the dynamics of the housing market have changed,” Lowe said in his statement. “Credit conditions are tighter than they have been for some time.”

While the RBA is an inflation- targeting bank, it’s also focused on asset prices after a Sydney and Melbourne property bubble helped drive household debt to a record 190.5% of income. But while record-low rates are spurring growth and hiring, protracted low inflation remains intact.

On the flip side, the currency’s 11% decline from its January peak provides some stimulus.

The RBA pointed out the “broad-based appreciation” in the US dollar and said the Aussie remains in a range it’s traded in for the past two years, though is currently “in the lower part” of that.

A Bloomberg economist said: “Soft wage growth constrains spending by households, which are also burdened by record levels of debt, much of which is funded at floating interest rates. This makes private consumption vulnerable to higher borrowing costs. We think the risk of a rate hike remains low as long as wage growth remains below 3% year-on-year and debt burdens continue to rise.”

From a distance, the Australian economy’s numbers are impressive: Unemployment has fallen to 5% and growth jumped to 3.4%; however, based on the US experience, the jobless rate probably has to fall further to drive up wages.

Offshore, risks are rising: The US-China trade conflict is posing a challenge for the economy Down Under, given it’s the most China-dependent in the developed world; moreover, an election is due in Australia by May, and polls show the less-business friendly Labor party is on track for victory.

As a result, traders are pricing in little chance of a rate hike in the next year.