Australia's 15th Interest-Rate Pause Sees It Drift From Peers

(Bloomberg) -- Australia’s central bank kept its benchmark interest rate unchanged and signaled no plans to move in the near term, even as developed economy counterparts shift toward withdrawing stimulus.

The Reserve Bank of Australia on Tuesday left the key rate at 1.5 percent 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 U.S., Canada and the U.K. 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 Fed, but with an emerging Asian tightening cycle.”

Australia's 15th Interest-Rate Pause Sees It Drift From Peers

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 signaled 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 labor market should see some lift in wage growth over time.”

Speed Limit

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

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; third-quarter data showed wage growth remained in the doldrums; another month of strong full-time hiring saw unemployment drop to 5.4 percent, the lowest in more than four years; and iron ore, Australia’s biggest export, has climbed 20 percent 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 pick-up in economic activity and inflation” than the bank currently forecasts. The local dollar edged slightly higher after the release to trade at 76.50 U.S. cents at 4:44 p.m. in Sydney.

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 third-quarter 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 GDP 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 policy makers to raise rates in the second half of 2018 as the pick up in wages and prices becomes more entrenched.

Lowe himself said two weeks ago that if the economy continues to improve as expected, the next move in rates will be up rather than down. But, he added, continued spare capacity and a subdued inflation outlook meant there isn’t a strong case for a near-term adjustment in policy.

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 fourth quarter of next year. The board doesn’t convene in January, so the next meeting will be Feb. 6.

“The low level of interest rates is continuing to support the Australian economy,” Lowe said in the conclusion of the statement. “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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