Australia’s Central Bank Holds Firm On Interest Rates

The Reserve Bank of Australia (RBA) has decided to make no change to its interest rates which does not come as a surprise as financial analysts had predicted the same. The central bank has also signaled that it will not be raising the rates any time soon.

The cash rate in Australia has been at a record low of 1.5 percent since August 2016. However there has been some speculation that the RBA might raise the rates given the strengthening of economic conditions in the country as well as moves by other central banks like the U.S Fed to tighten monetary policy.

The RBA however said in a statement that while overall economic conditions were improving with increasing capacity utilization, growth consumption was still on the lower side which indicated slow wage growth and increased household debt. RBA governor Philip Lowe also pointed out that the trends in the labor market were still mixed.

In a statement Lowe said,

Employment growth has been stronger over recent months. The various forward-looking indicators point to continued growth in employment over the period ahead. Wage growth remains low, however, and this is likely to continue for a while yet. Inflation is expected to increase gradually as the economy strengthens

Australia has avoided recession for a record 26 years but growth registered for the first quarter of the year was 0.3 percent, which translated into an annual rate of expansion of 1.7 percent, the lowest since 2009. Indicators show slow growth in wages and household income, prevalence of underemployment and very high levels of household debt.

The RBA noted the danger of lowering interest rates, highlighting that it would drive property prices further up. The CoreLogic Hedonic Home Value Index released recently for the second quarter of this year has reported that capital city dwelling values were up 0.8 percent on a quarterly basis and 9.6 percent on a yearly basis.

RBA further observed that rent increases were currently at their slowest in two decades but household debt growth was outpacing growth in household income. Kate Kickie, Australia and New Zealand economist at Capital Economics has predicted that the RBA is likely to hold firm on interest rates for a long time due to concerns around household debt and financial stability.

Kickie pointed out that according to first quarter data, household debt in the country was now at a record 190 percent of disposable income. The Australian dollar dropped to a low of $0.7601 on the news. The RBA has said that an appreciating currency could affect the economy’s adjustment to lower mining investments.