RBA Holds Rates at Record Low Amid Sluggish Growth Outlook

The Reserve Bank of Australia kept its benchmark interest rate unchanged amid a mixed picture of weaker growth signals, a stronger jobs market and a slowing of house prices.

Governor Philip Lowe and his board left the cash rate at a record-low 1.5 percent Tuesday, as expected by all economists surveyed by Bloomberg. Patchy data suggests that the economy’s first-quarter growth will be weak ahead of numbers due Wednesday, with a report today showing net exports will be a bigger drag on gross domestic product than expected.

“Year-ended GDP growth is expected to have slowed in the March quarter, reflecting the quarter-to-quarter variation in the growth figures.” Lowe said in a statement. “Looking forward, economic growth is still expected to increase gradually over the next couple of years to a little above 3 per cent.”

The Australian dollar rose, buying 74.90 U.S. cents at 2:58 p.m. in Sydney compared with 74.74 cents prior to the decision.

The central bank said employment had been stronger over recent months, but weak wage growth was likely to continue for some time and “is restraining growth in household consumption.” Underemployment is keeping a lid on wage pressure, with Lowe noting that growth in total hours worked remained weak.

Most economists expect the RBA to hold or increase rates over the next year even as market bets for further easing creep higher amid a cloudier outlook. While May data showed employment gains and a surprise rebound in retail sales, construction has been soft and wage growth stagnant. There were also signs of a cooler housing market after prices dropped in May for the first time in 18 months.

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Housing “prices have been rising briskly in some markets, although there are some signs that these conditions are starting to ease,” said Lowe.

The broad-based pick-up in the global economy is continuing, Lowe said, with above-trend growth expected in a number of advanced economies. Iron ore and coal prices had declined over recent months, as expected, unwinding some of their strong gains.

“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,” Lowe reiterated Tuesday.

Jobs, Housing

The RBA said in minutes from its May meeting that it was closely monitoring the labor and housing markets. Recent evidence suggests the risks to both are finely balanced.

The jobless rate dropped to 5.7 percent in May after a second straight month of solid employment gains, yet wage growth has been stagnant, suggesting a fair amount of slack in the market. Record levels of underemployment — where workers are willing and able to work more hours — helps to explain that.

The long-awaited cooling of east coast house prices may also be starting to feed through. Sydney prices dropped 1.3 percent and Melbourne 1.7 percent last month, according to the latest CoreLogic survey, while auction clearance rates in both cities have also been softer in recent weeks.

Inflation, GDP

As far as consumer prices go, the central bank’s expectations are largely being met. Headline inflation returned to the bottom end of the RBA’s 2 percent to 3 percent target in the first three months of the year after spending nine quarters below it, but the key core measure is yet to catch up.

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Wednesday’s GDP report is expected to show just 0.3 percent growth in the first quarter from the previous three months, according to economists’ median estimate as of 2 p.m. Tuesday. Still, the RBA may be willing to look past a soft performance in the early part of 2017, mindful of some temporary weather-related factors.