March 20, 2018 / 12:41 AM / 6 months ago

Australia central bank holding rates with eye on high household debt

SYDNEY, (Reuters) - Australia’s central bank took account of high household debt while holding interest rates at record lows this month, arguing faster wage growth was needed to assure a long-awaited recovery in inflation.

Two women walk next to the Reserve Bank of Australia headquarters in central Sydney, Australia February 6, 2018. REUTERS/Daniel Munoz

The Reserve Bank of Australia (RBA) has left rates at 1.50 percent since last easing in August 2016, the longest spell of stable policy since the early 1990s.    

That had helped in reducing the unemployment rate to 5.5 percent and bringing inflation closer to its 2-3 percent target band, minutes of the RBA’s March meeting showed.    

“Further progress on these goals was expected over the period ahead, but this process was likely to be gradual,” the minutes showed.

In particular, policy makers noted that strong jobs growth had yet to deliver a “definitive pick-up” in wages.

Another area of uncertainty was rising private debt as Australians took advantage of low interest rates to speculate in the property market.    

“Household balance sheets still warranted careful monitoring,” the RBA warned.    

Still, policy makers remained confident Australia’s economy will “exceed potential growth” in 2018, helped by a synchronised upturn in global activity.    

Their optimism was somewhat tempered as the RBA removed an earlier reference to economic growth of a “little above 3 percent” over the next two years.    

Data out this month showed growth in Australia’s A$1.8 trillion (£1 trillion) economy slowed last quarter as bad weather hit exports, although stronger consumption helped extend its 26-year run without recession.

The annual pace of growth braked to a disappointing 2.4 percent, from an upwardly revised 2.9 percent in the September quarter.

That is one reason the RBA is in no hurry to put up rates, with Governor Philip Lowe recently saying the board saw no “strong case” for a move.

Shoppers started 2018 on the back foot with retail sales up a tepid 0.1 percent in January, missing expectations for a gain of 0.4 percent. Sales had slipped 0.5 percent in December.

The RBA has now spent more than seven years without hiking, the longest span since the official cash rate was introduced in 1990. Futures markets imply this period of stability will likely last for another year.

There were also reasons for cheer.

Australia’s streak of employment gains is now the longest on record with the jobless rate at 5.5 percent.

Non-mining business investment is on the rise while government spending on public infrastructure was also likely to support economic growth for some time.    

Reporting by Swati Pandey and Wayne Cole;  

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