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Australia's central bank keeps rate steady, dismayed at high-flying A$

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Australia's central bank on Tuesday marked a full year without changing interest rates, and many economists suspect rates could stay at record lows of 1.5 per cent for yet another year as it wrestles with a strong currency and weak inflation.

[SYDNEY] Australia's central bank on Tuesday marked a full year without changing interest rates, and many economists suspect rates could stay at record lows of 1.5 per cent for yet another year as it wrestles with a strong currency and weak inflation.

The Reserve Bank of Australia (RBA) stepped up its rhetoric against a rising local dollar saying the higher exchange rate will further compress consumer prices, weighing on the outlook for growth and employment.

The Australian dollar AUD-D4 has jumped about 8 per cent since June to a two-year peak, largely driven by a battered greenback. It was last steady at US$0.8010.

In response the RBA inserted a new paragraph in its latest policy statement, saying, "an appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast". While the RBA did sound upbeat about the overall economy, its optimism was restrained by tepid inflation, record-low wages growth and mounting consumer debt.

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Subdued inflation, however, is not an Australian phenomenon. Consumer prices remain low or sluggish in most major economies including the United States, Europe and China even as growth has stayed largely solid. That has partly led the Federal Reserve to tamp down on market expectations over the future pace of tightening.

Core inflation - the main focus for policymakers - has remained below the RBA's target band since early 2016, prompting it to lower interest rates twice last year.

The central bank expects a gradual pick-up in inflation and forecast the A$1.7 trillion economy to grow at around 3 per cent over the next couple of years.

"The main surprise was a ramping up in the level of concern about the stronger Aussie," said CBA economist Michael Blythe.

"The RBA last pulled the policy lever in August 2016. We suspect another year of masterly inactivity is in store from here. And any serious debate about lifting rates is unlikely before late 2018."

A majority of the 42 economists polled by Reuters forecast a steady rate outlook over a one-year horizon, with only nine expecting a rate hike.

SUBDUED SPENDING

One positive is the recent pick up in the labour market with more full-time jobs than part-time. Corporate profits are surging while measures of business confidence and conditions are the strongest since 2008.

Still, wages growth is stuck at a record low 1.9 per cent - less than half the rate workers enjoyed a decade ago.

That, together with record high household debt at 190 per cent of disposable income, is crimping consumer spending.

"One source of uncertainty for the domestic economy is the outlook for consumption. Retail sales have picked up recently, but slow growth in real wages and high levels of household debt are likely to constrain growth in spending," the RBA said.

Household indebtedness has increased as more Australians speculate in the property market, particularly in Sydney and Melbourne where prices have broadly doubled since 2008.

Regulators have taken stringent action since the start of the year to ease the brisk pace of house prices and, while there are early signs of a slowdown, the RBA is not fully convinced those measures are bearing fruit.

"It is clear that the RBA harbours some concerns about the consumer outlook and the slow pace of wage rises, despite its constructive views on employment," said Citi economist Paul Brennan.

"We continue to expect no change in the cash rate this year and well into next year."

REUTERS

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