June 5, 2018 / 3:31 AM / 5 months ago

Australia keep interest rates unchanged, flags upbeat outlook

SYDNEY (Reuters) - Australia’s central bank left interest rates at record lows on Tuesday, as expected, and expressed confidence in the economy’s ability to extend its 26-year run without recession, thanks to stronger exports and government spending.

FILE PHOTO: Streaks of light from arriving ferries illuminate wharves at Sydney's Circular Quay terminal in this seven-minute-long time exposure at dusk, July 16, 2015. REUTERS/Jason Reed/File Photo

The Reserve Bank of Australia (RBA) held policy rates at 1.50 percent for a 22nd straight meeting, citing lukewarm inflation and wage growth. However, it expects the country’s average gross domestic product (GDP) growth to accelerate to “a bit above” 3 percent in 2018 and 2019.

The upbeat outlook comes as analysts upgraded forecasts for first-quarter GDP, due Wednesday, following a run of better-than-expected data this week.

Australia’s A$1.8 trillion economy is expected to have expanded a brisk 0.9 percent in the March quarter from 0.4 percent in December, according to a consensus of 19 economists polled by Reuters. The annual pace likely accelerated to a healthy 2.8 percent, from 2.4 percent in December. [ECONAU]

Before this week’s data, economists had expected growth of 0.8 percent for the quarter and 2.7 percent for the year.

“The recent data on the Australian economy have been consistent with the bank’s central forecast for GDP growth to pick up, to average a bit above 3 percent in 2018 and 2019,” RBA Governor Philip Lowe said on Tuesday.

“Business conditions are positive and non-mining business investment is increasing. Higher levels of public infrastructure investment are also supporting the economy. Stronger growth in exports is expected.”

Indeed, figures from the Australian Bureau of Statistics (ABS) on Tuesday showed government spending climbed 1.6 percent in the first quarter to an inflation-adjusted A$84.6 billion $64.7 billion), lifting potential for growth.

Separate data showed stronger exports and a relatively smaller rise in imports combined to add 0.3 percentage points to gross domestic product (GDP) last quarter.

The jump in goods exports helped narrow the country’s current account deficit to the smallest since early 2017 at A$10.5 billion.

A private sector survey on Tuesday showed activity in the services sector - a major engine of growth in the economy - rose at its fastest pace in over 13 years in May.

WEAK CONSUMPTION

However, household consumption — which accounts for around 57 percent of GDP — remains a “continuing source of uncertainty” for the RBA as wages grow slowly and debt remains elevated.

That is a major reason behind the RBA’s decision to hold rates, which have remained at their current setting since August 2016, marking the longest period of unchanged policy since the cash rate was introduced in 1990. The futures market <0#YIB:> is not fully pricing in a hike until September next year.

“The household consumption and wages numbers will be a key focus in (Wednesday’s) GDP report,” said Felicity Emmett, Sydney-based senior economist at ANZ.

“Preliminary data suggest wages are likely to show ongoing modest growth ... with other measures of wages growth showing varying degrees of improvement,” Emmett added.

“This will clearly be a key focus for the RBA, with the bank firmly on hold until it can see a material acceleration in wages growth.”

Slideshow (2 Images)

While strength in retail and car sales in the first quarter suggest consumption made a reasonable contribution to overall activity, data out on Tuesday showed that momentum has faded.

New vehicle sales slipped in May for the second straight month as demand for light commercial vehicles and passenger cars declined.

Retail sales growth in April was a tepid 0.4 percent after a flat March.

Reporting by Swati Pandey; Editing by Sam Holmes

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