Pedestrians walk past the Reserve Bank of Australia (RBA) headquarters in Sydney, Australia. (Photographer: Brendon Thorne/Bloomberg)

Australia Holds Key Rate as Employment Bonanza Winds Down

(Bloomberg) -- Australia left its key interest rate unchanged at a record low Tuesday -- as expected -- amid the slowing of a hiring boom.

Reserve Bank Governor Philip Lowe kept the cash rate at 1.5 percent, where it has stood since late 2016, as the central bank waits for inflation to strengthen. The nation’s jobs growth has declined to a three-month annualized pace of 1.2 percent in 2018 from a blockbuster 3.4 percent for the whole of last year, Westpac Banking Corp. estimates.

“The bank’s central forecast for the Australian economy remains for growth to pick up, to average a bit above 3 percent in 2018 and 2019.,” Lowe said in a statement. “Employment has grown strongly over the past year, although growth has slowed over recent months.”

The RBA has shifted to a supporting role in the nation’s economy, styling itself as a predictable player. Lowe has said the next rate move will likely be an increase at some point, reflecting forecasts for faster growth that are due to be updated Friday. Traders are pricing in little chance of a tightening this year as inflation hovers near the bottom of the central bank’s 2 percent to 3 percent target, with 2019 seen as a more realistic prospect.

“Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual,” Lowe said. “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.”

Tuesday’s statement had the fewest changes of any since April 2016, according to calculations by Bloomberg.

“We continue to see wage growth as the critical component for the RBA to begin hiking rates,” said Daniel Blake, a strategist at Morgan Stanley in Sydney. “With the unemployment rate expected to increase somewhat, this is unlikely to happen until later in 2019.”

The local dollar was little changed after the statement, trading at 75.40 U.S. cents at 3:22 p.m. in Sydney from 75.41 prior to the release. It’s fallen about 6 percent in the past three months.

While a lower Aussie helps the trade-reliant economy, the currency would probably need to fall into the 60s for a sustained period -- potentially almost a year -- to change the central bank’s calculations. It’s waiting for a fall in the jobless rate toward an estimated full employment level of about 5 percent -- from 5.5 percent at present.

“The various forward-looking indicators continue to point to solid growth in employment in the period ahead, with a further gradual reduction in the unemployment rate expected,” the RBA chief said. “Notwithstanding the improving labor market, wages growth remains low. This is likely to continue for a while yet.”

The governor is due to speak at an RBA board dinner in Adelaide this evening.

Debt Pile

Australia’s economy is being constrained by record-high household debt, fueled by buyers chasing property prices higher in recent years, and stagnant wages that reflect global trends and a local labor market with excess capacity.

“One continuing source of uncertainty is the outlook for household consumption,” the governor said. “Household income has been growing slowly and debt levels are high.”

Lowe added that “in the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. APRA’s supervisory measures and tighter credit standards have been helpful in containing the build-up of risk in household balance sheets, although the level of household debt remains high.”

Tax Relief

While Sydney house prices are now falling, consumers are likely to receive a bit of a boost in the government’s May 8 budget, which is expected to include tax cuts. That, together with a substantial infrastructure program, has returned fiscal policy to center stage after an almost decade-long hiatus.

The tax cuts are driven by a combination of improved revenue and a government trailing in opinion polls less than a year out from an election. They’re likely to be timely given the lack of options for household stimulus.

At the same time, Australian banks -- currently under the microscope as an inquiry hears of misconduct and mistreatment of customers -- face a jump in short-term financing costs. They’re unlikely to pass these on to borrowers at this stage due to the backlash over what’s been revealed at the hearings.

Lowe provided a description of recent events in money markets, without giving analysis.

©2018 Bloomberg L.P.

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