Australia holds rate, repeats high AUD to dent growth

     Australia’s central bank kept its benchmark cash rate at 1.50 percent, as widely expected, and repeated last month’s comment that a rise in the exchange rate of the Australian dollar “would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.”
      But the Reserve Bank of Australia (RBA), which has maintained its rate since cutting it in August 2016, also said recent economic data was consistent with its expectation the country’s growth would gradually pick up over the coming year.
      A steady strengthening of the Australian dollar since May came to a halt in the last month following the RBA’s previous meeting on Aug. 1 when it ratcheted up its warning about the detrimental impact that a stronger currency would have on economic activity and inflation.
       In today’s statement RBA Governor Philip Lowe repeated the rise in the Australian dollar, known as the Aussie, partly reflected the decline in the U.S. dollar but this rise would contribute to subdued price pressures and weigh on the outlook for output and employment.
      Lowe’s comment about the Aussie today and last month went beyond earlier statements that said a higher exchange rate would “complicate” the adjustment from booming mining investment.
      Today the Aussie was trading at 1.26 to the U.S. dollar, largely unchanged since Aug. 1 but still up 10 percent this year.
       ”The decline in mining investment will soon run its course,” Lowe said, adding the outlook for non-mining investment had improved and business conditions are at a high level, with retail sales picking up.
      But growth in real wages remains slow and high household debt is likely to restrain the rise in future spending, he added.
       Last month the RBA said the country’s economy is expect to grow at a rate of around 3 percent in coming years. This forecast was not repeated today.
      Australia’s Gross Domestic Product grew by 0.3 percent in the first quarter of this year from the fourth quarter of last year for annual growth of 1.7 percent, down from 2.4 percent.
      A deceleration in Australia’s inflation rate to 1.9 percent in the second quarter of this year from 2.1 percent in the first quarter reflect a decline in oil prices but inflation still remains higher than the 1.0 percent seen in the second quarter of 2016.
      Lowe confirmed that he still expects inflation to pick up gradually as the economy strengthens.
      On Aug. 11 Lowe told parliament’s economics committee that he expects to keep interest rates  at record lows for a while yet and any tightening is some time away and likely to be gradual to give households time to reduce their debt.
      Australia’s household debt-to income ratio is at a record high of 190 percent and rising faster than incomes.

    The Reserve Bank of Australia issued the following statement:

The low level of interest rates is continuing to support the Australian economy. 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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