SYDNEY: Australia’s central bank stuck to a neutral stance on the economy and interest rates on Tuesday, a marked divergence from some of its peers abroad who have recently signalled an intent to tighten monetary policy.
The Australian dollar sank half of a US cent after the Reserve Bank of Australia (RBA) finished its July policy meeting with rates staying at a record low 1.50%, where it has been since August last year.
Investors had bid the currency up on speculation the central bank would turn hawkish like its counterparts in Europe and Canada. Instead, its statement was anodyne.
“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,” it repeated.
Indeed, it even refrained from highlighting the recent pick up in employment, noting only that the indicators remain “mixed.”
Official data showed employment blew past forecasts to jump 42,000 in May, a third straight month of upbeat outcomes that drove the jobless rate to a four-year trough of 5.5%.
The RBA’s reticence to play up the numbers even led the futures market to pare back the probability of a hike in interest rates. The December contract implied a 4% chance of a move higher, down from 12% on Monday.
Su-Lin Ong, head of fixed income strategy for Australia and New Zealand at Royal Bank of Canada, said the central bank’s statement showed a ”firmly neutral bias” on policy.
“Following the shift in global central banking rhetoric in recent weeks, the hawks were disappointed by the RBA today and we expect that to remain the case for some time,” she said.
The RBA did sound optimistic about future economic growth, but cautioned against record high household debt in the country’s red-hot property market especially as wages growth was stuck at its slowest pace ever.
The central bank fears that trend of household debt outpacing income growth was eating into spending elsewhere in the economy.
CONSUMERS SHOW PANACHE
Earlier, data from the Australian Bureau of Statistics (ABS) showed the country’s retailers enjoyed another strong month of sales in May as shoppers splurged on household goods, a sign that the economy picked up speed after a disappointing first quarter.
Retail sales rose 0.6 in May, beating expectations for a meagre 0.2% increase. It also follows a solid 1.0% jump in April, marking the best two months of sales since end-2013.
The data should comfort the RBA which had feared ballooning debt in the sizzling property sector was pinching consumers’ ability to spend elsewhere in the economy.
“Two firmer months together do suggest the consumer was doing more of the heavy lifting when it comes to economic growth in the second quarter,” said Michael Blythe, chief economist at Commonwealth Bank.
But ”the fundamentals are still poor - people are worried about losing their jobs or ever getting a wage rise. So it’s hard to say this is a definitive turning point.” - Reuters
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