RBA stands pat, completes 2 years on the sidelines

SYDNEY–The Reserve Bank of Australia on Tuesday completed two years of policy stasis, keeping its benchmark interest rate unchanged at a record low 1.5%.

The widely anticipated on-hold verdict of the RBA board extends a record period of inactivity around interest rate stretching from mid-2016, with economists betting the quiet will go on for some time to come.

Subdued wages growth, soft inflation, and generous spare capacity in the job market may continue to keep the RBA sidelined well into 2019, and potentially 2020, according to economists.

"A further gradual decline in the unemployment rate is expected over the next couple of years to around 5%. Wages growth remains low. This is likely to continue for a while yet," RBA Governor Philip Lowe said in a statement accompanying the decision.

"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," he said.

The decision keeps the RBA at odds with many of its global counterparts, like the Federal Reserve, the Bank of Canada, and the European Central Bank, where the debate has shifted on how aggressively to tighten policy reins.

The RBA is due to publish its latest economic forecasts on Friday, with cautious optimism expected in the numbers as the central bank waits for inflation to rise.

The resource-rich economy is expected to have grown solidly in the second quarter, supported by rising investment, robust commodity prices, and a government-led infrastructure boom.

But it won’t be enough to tip the policy needle toward interest rates increases for some time. Core inflation in the second quarter showed softness, indicating inflation will remain below the RBA’s desired 2-3% band for now.

Core inflation rose by an average of 0.5% in the quarter and by 1.9% on-year. In the first quarter, core inflation was running at 2.0% on-year.

Outlook for growth remains uncertain as house prices have begun to slide, led by the property markets in the biggest capital cities. It threatens to undermine consumer confidence and spending.

Consumers are already under stress, battling record household debt, and wages growth that has been benign for years.

Shane Oliver at AMP Capital Markets said the next move in interest rates may well be down if the house prices retreat accelerates.

With one third of all Australia’s exports going to China, the country is also vulnerable to any slowdown in Asia’s biggest economy due to rising trade tensions with the U.S.

"One uncertainty regarding the global outlook stems from the direction of international trade policy in the United States," Gov. Lowe added.

-Write to James Glynn at [email protected]

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