Australia Holds Key Rate as Central Bank Sounds Caution on China

(Bloomberg) -- Australia held its interest rate at a record low as the central bank delivered a more sobering take on the global economy.

Reserve Bank Governor Philip Lowe and his board kept the cash rate at 1.5 percent, where it has now been for two years, in Sydney on Tuesday. Lowe amended his language on China’s economy in his accompanying statement, saying growth “has slowed a little” instead of growing solidly. He noted authorities there easing policy while heeding risks in the financial sector.

“The RBA quite rightly sounded a little less upbeat on the global outlook,” said Paul Dales, chief economist for Australia at Capital Economics. It “suggested that interest rates won’t rise for a while yet. Our more cautious forecasts suggest that rates may not rise until late in 2019, if not sometime in 2020.”

Lowe has come under pressure to tighten policy like his global peers, a push he has resisted and which may provide vindicated given prospects of a U.S.-China trade war are intensifying. Australia is the most China-dependent developed economy with about a third of its exports going there. The governor reiterated that U.S. trade policy was a key uncertainty for the global outlook.

Australia Holds Key Rate as Central Bank Sounds Caution on China

The RBA has kept rates low in expectation the stance will gradually tighten the labor market and spur wage gains sufficiently to drive faster inflation. But outside strong economic growth and increased demand for construction workers amid an infrastructure boom, there are few signs of this emerging.

“The bank’s central forecast for the Australian economy remains unchanged,” Lowe said. “GDP growth is expected to average a bit above 3 percent in 2018 and 2019. This should see some further reduction in spare capacity.”

The RBA maintains its next move is more likely to be up than down; Lowe, since taking the helm in September 2016, has consistently said that an increase will only come once the economy is near full employment and inflation closer to the central bank’s 2-3 percent target midpoint. Markets aren’t pricing in a rate increase for at least another year, according to bets by swaps traders.

Jobs, Wages

Lowe said the outlook for the labor market “remains positive” and predicted a further gradual decline in unemployment “over the next couple of years to around” 5 percent. The jobless rate is currently 5.4 percent.

“Wages growth remains low,” he acknowledged. “This is likely to continue for a while yet, although the improvement in the 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 increased reports of skills shortages in some areas.”

A swing factor remains the Australian dollar, which is trading at around 74 U.S. cents and has held in a relatively tight range in recent weeks. The currency is often used as a proxy for betting on China and any setbacks to the world’s second-largest economy could filter down to it. But the Aussie would probably need to fall into the 60s for a sustained period -- potentially almost a year -- to really change the central bank’s calculations.

Australia’s economy reached 27 years without a recession on June 30, an expansion underpinned by high immigration -- the population is set to reach 25 million today -- and strong export volumes to China. The key risk at home remains an overpriced east-coast property market, though values are cooling and the RBA will be hoping for a soft landing.

Lowe is due to speak in Sydney Wednesday and the central bank will release its quarterly updated forecasts for economic growth and inflation Friday.

“The latest inflation data were in line with the bank’s expectations,” Lowe said. “The central forecast is for inflation to be higher in 2019 and 2020 than it is currently. In the interim, once-off declines in some administered prices in the September quarter are expected to result in headline inflation in 2018 being a little lower than earlier expected, at 1.75 percent.”

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