Weak wages, spending keep RBA on hold

Peter Trute and Wayne Cole
(Australian Associated Press)

 

The Reserve Bank has left Australia’s official interest rate at its record low level of 1.5 per cent for the 23rd month in a row, with weak household spending remaining an area of concern for the economy.

RBA governor Philip Lowe has returned to a familiar theme in his statement following the central bank’s decision on Tuesday to leave the cash rate unchanged, citing soft consumer spending and high household debt as sources of “uncertainty” for economic recovery.

The sluggish improvement in wages and the risk to global growth from the United States’s new tariff-focused trade stance were also listed as risks by the central bank boss.

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

He said inflation is low and “likely to remain so for some time” as a result of the weak growth in wages and the effects strong competition is having in keeping retail prices low.

“One continuing source of uncertainty is the outlook for household consumption,” Dr Lowe said.

“Household income has been growing slowly and debt levels are high.”

“Gradual” has become an oft repeated word in the RBA’s rates statement as inflation remains stubbornly below the bank’s two-to-three per cent target band and wages fail to revive despite increased job numbers.

An added danger has come from US President Donald Trump’s use of tariffs against China – Australia’s biggest export market – and Europe.

“One uncertainty regarding the global outlook stems from the direction of international trade policy in the United States,” Dr Lowe said.

At recent events, he called a potential trade war the greatest single external threat to Australia’s prosperity.

Two-way trade accounts for around 45 percent of Australia’s annual gross domestic product (GDP).

A Reuters poll of 34 analysts had found all but one expected the cash rate to be left unchanged this week, with an increase now not expected before the third quarter of 2019.

The case for a hike has also been weakened by a sharp cooling in the once red-hot housing market.

A clamp-down by regulators on investment lending and rising funding costs for banks mean house prices nationally are now falling for the first time since 2012.

Sydney prices were down 4.5 percent in June, from a year earlier, according to data out this week from property consultant Core Logic. At the peak of the boom, they had been rising by more than 20 percent annually.

That is potentially a painful hit to wealth given the housing stock is valued at a heady A$6.9 trillion ($5.06 trillion).

“It’s consistent with a fading ‘household wealth effect’ dragging on consumption,” UBS economist George Tharenou said.

“Macroprudential policy is reducing borrowing capacity and leading to a clear weakening of housing, which we expect to continue ahead.”

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