Australia keeps rates on hold at record low

Weak inflation, sluggish wage growth and high levels of household debt saw Australia’s central bank keep interest rates on hold at a record low on Tuesday.

The Reserve Bank of Australia slashed the cash rate from November 2011 to August 2016 to 1.50 percent to boost the economy as it transitioned away from a mining investment boom and it has not moved since.

Most economists are not expecting the bank to lift them until late next year, or even 2020, given household debt and slow wages growth continues to affect consumer spending.

And with one of Australia’s big four lenders — Westpac — pushing up its mortgage borrowing costs out-of-cycle since the central bank last met in August, the chances of an official rate hike appear to have receded even further.

Other major banks are widely expected to follow suit.

“While the rise in mortgage rates on average is small at around 15 basis points, it’s still another dampener on consumer spending and home-buyer demand,” said AMP Capital chief economist Shane Oliver.

“It will hit the home-buyer market particularly in Sydney and Melbourne at a time when it’s already down. As such it’s a de-facto monetary tightening and is yet another reason for the RBA to remain on hold for longer.”

The RBA continues to put its faith in lower unemployment helping to boost wage growth and eventually lift inflationary pressures.

Unemployment is currently at 5.3 percent, the lowest level in almost six years.

“A further gradual decline in the unemployment rate is expected over the next couple of years to around five percent,” said Reserve Bank governor Philip Lowe.

“Wages growth remains low, although it has picked up a little recently. The improvement in the economy should see some further lift in wages growth over time, although this is likely to be a gradual process.”

Inflation sits around two percent, with the bank having a target of 2-3 percent.

“The central forecast is for inflation to be higher in 2019 and 2020 than it is currently,” said Lowe.

“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,” he added.

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