Australia Maintains Record Low Interest Rate

Table 12

Table 12

Reserve Bank of Australia Governor Philip Lowe said on Tuesday the bank board had made a decision to leave the cash rate at 1.5 per cent, where it has now been for 12 months. With business conditions improving, and capacity utilisation increasing, "some pick-up in non-mining business investment is expected". Labour markets have tightened further and above-trend growth is expected in a number of advanced economies, although uncertainties remain.

Higher commodity prices, weakness in the USA dollar and some lingering speculation that the RBA might take a more hawkish view on policy are among the factors lifting the Aussie dollar.

The country's cash rate remained at 1.5 percent amid weak wages and subdued inflation.

'I would interpret the Governor Phil Lowe's speech last week as suggesting he's at least entertaining the possibility that for any particular rate of output growth. the inflation rate would be lower, ' he said.

The Bank of England (BOE) rate meeting is the main release for the Pound in the week ahead.

Forecast for growth were unchanged.

It was this time previous year that the central bank last cut rates by 25 basis points, down from 1.75 per cent. The economy is nearly out of the reversal of mining investment that had been weakening growth of late - another bonus. The current high level of residential construction is forecast to be maintained for some time, before gradually easing.

The RBA is also expected to keep in place its upbeat growth forecasts for gross domestic product when it publishes its revised outlook for the economy on Friday.

In his statement, Dr Lowe said that although retail sales had picked up recently, "slow growth in real wages and high levels of household debt are likely to constrain growth in spending".

Employment growth has been stronger over recent months, and has increased in all states.

The bank noted that forward-looking indicators point to continued growth in employment over the period ahead. The unemployment rate is expected to decline a little over the next couple of years.

A break below the 1.6259 lows would probably confirm a continuation - initially to a target no lower than1.6200 where Trendline A is situated and likely to provide an obstacle to further downside.

The central bank kept its benchmark rate at 1.5% yesterday, as expected.

"What's more the strength in the Australian dollar will only put more downward pressure on inflation". A factor working in the other direction is increased competition from new entrants in the retail industry.

"With the Australian dollar having rallied by 4¢ against the USA dollar since the last board meeting, the central bank could easily have shifted to more aggressively jawboning the currency if they were worried".

The Reserve Bank signalled that it was not particularly anxious about housing prices, saying they were rising briskly in some markets, albeit more slowly.

RBC capital markets are bullish the Aussie versus the Pound as, "Absent any shift in rate expectations, our default position remains to buy dips in AUD as the outright yield continues to draw in investors while volatility and global yields remain historically low". "It implies they're a long way from raising interest rates". The weakness remains household debt - at a record 190% of income and among the world's highest - which is still outpacing income growth.

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", the bank said.

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