Australia Holds Key Rate as Weaker Currency Aids Growth Outlook

(Bloomberg) — Australia left interest rates unchanged amid currency weakness that could help spur growth and hasten inflation’s return toward its target.

Reserve Bank of Australia Governor Philip Lowe and his board kept the cash rate at a record-low 1.5 percent for a 20th straight month on Tuesday, with markets and economists expecting no change in policy until next year. That’s increasingly making the RBA an outlier from developed-world peers that are preparing to unwind stimulus or already doing so.

“The bank’s central forecast remains for faster growth in 2018,” Lowe said in a statement announcing Tuesday’s decision. “One continuing source of uncertainty is the outlook for household consumption, although consumption growth picked up in late 2017. Household income has been growing slowly and debt levels are high.”

The local dollar was little changed, trading at 76.87 U.S. cents at 2:35 p.m. in Sydney from 76.89 cents prior to the release. It’s fallen more than 5 percent from a late-January peak.

Lowe has said the next rate move is likely to be up, but also made it clear the economy’s return to full employment and inflation getting nearer the 2.5 percent midpoint of the RBA’s target will only be gradual. A lower exchange rate could speed that process up by boosting exports, with a gauge of manufacturing activity rising to its highest level yet in March.

But the picture is muddled. A key reason for the currency’s weakness is that iron ore, Australia’s biggest overseas earner, slumped into a bear market last month. Australia also risks becoming the meat in the sandwich in any U.S.-China trade war: America is Australia’s biggest foreign investor and key security ally, while China is its biggest trading partner.

While the central bank predicts Australia will expand faster than its estimated speed limit of 2.75 percent this year, that’s partly due to falling mining investment no longer dragging on growth. Gross domestic product expanded a less-than-forecast 2.4 percent in the final three months of 2017, data that was released a day after the RBA’s March policy meeting.

Australia’s economy is hampered by record-high debt after households tapped low rates to chase house prices higher in bubble-like conditions in the eastern capitals. Prices have since begun to ease, with Sydney falling 1.7 percent last quarter and Melbourne 0.5 percent.

Unemployment stands at 5.6 percent, above the 5 percent estimate of full employment that would normally spur faster wage growth and higher inflation. Inflation, meanwhile, is hovering just below the bottom of the central bank’s 2 percent to 3 percent target band.

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