Australia’s central bank has signalled the next move in interest rates will be a hike but that won’t happen for some time yet as it remains worried about limp household spending and inflation.
At its first meeting of 2018 on Tuesday, the RBA board decided to leave the cash rate at 1.5 per cent, the record low it has remained at for 18 months.
Governor Philip Lowe said business conditions are positive and increased public infrastructure spending was supporting the economy, but the outlook for household consumption remains uncertain.
“One continuing source of uncertainty is the outlook for household consumption,” Dr Lowe said in a statement.
“Household incomes are growing slowly and debt levels are high.”
Dr Lowe noted underlying inflation was running a little below the bank’s target range of between two and three per cent, and was expected to gradually improve as the economy strengthens.
“Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual,” he said.
JP Morgan chief economist Sally Auld expects the RBA to keep rates on hold for the remainder of 2018.
“This is a signal that the next move in rates will be up but not anytime soon,” she said of Dr Lowe’s remarks on unemployment and inflation.
TD Securities chief Asia-Pacific macro strategist Annette Beacher said Dr Lowe’s balanced tone was familiar, noting improved global growth is supporting commodity prices, and a strong local labour market and positive public and private investment outlook was expected to lift inflation and wages’ growth.
“The weak spot is the bank’s ‘usual’ concern about low income growth and high household debt generating tepid household consumption,” she said.
The Australian dollar was already losing ground after the release of weaker than expected retail and international trade data, and dipped further following the RBA’s decision.
The local currency was trading at 78.59 US cents at 1626 AEDT, from 78.73 US cents ahead of the announcement.