SYDNEY (Reuters) - The Reserve Bank of Australia (RBA) expects to make only gradual progress in reducing unemployment and having inflation return to its 2-3 percent target band, signalling interest rates will stay at record lows for a while yet.
The RBA has held rates at 1.50 percent since last easing in August 2016, as it seeks to strike a balance between the benefits of policy stimulus and the risks associated with skyrocketing household debt.
That is the longest stretch of stable rates since the mid-1990s and Governor Philip Lowe is willing to be patient still.
“Our central scenario for the Australian economy is for a further reduction in the unemployment rate and an increase in inflation towards the mid-point of the target range,” Lowe told a parliamentary economics committee.
“As things currently stand, we expect that progress to be steady, but to be only gradual,” Lowe added. “Given this assessment, the Reserve Bank board does not see a strong case for a near-term adjustment of monetary policy.”
Australia has seen a jobs boom since the beginning of 2017 but the unemployment rate is stuck around 5.5 percent as more look for work, and wage growth is crawling near its slowest pace on record.
Lowe said he would like to see annual wage growth of around 3.5 percent from the current 2 percent.
“The job market, especially changes in wage growth, is the area to watch,” said Craig James, Sydney-based chief economist at CommSec.
“Lowe was concerned that annual wage growth near 2 percent was being seen as the new norm. Governor Lowe said that a 2.5 percent inflation rate was consistent with a 3.5 percent lift in wages.”
Subdued wage growth is a global phenomenon, but Lowe expects companies to start increasing pay rewards as the labour market tightens further.
That will in-turn help lift inflation which has undershot the RBA’s target for more than two years.
The RBA is loath to ease again as it fears lower interest rates would push households into a debt binge. Already the household debt to income ratio is at record highs.
Lowe noted that the build-up of risks in household balance sheets has been contained, thanks to macro-prudential measures, although dangers remain.
He also had misgivings about the benefits from lower corporate tax rates, saying the outlook for rising U.S. budget deficit was “very problematic.”
Investors are worried about the twin deficits in the United States amid a government spending splurge and large corporate tax cuts. Lowe said he would not want tax cuts in Australia to lead to higher deficits.
The U.S. national debt recently topped $20 trillion, while the 2019 fiscal deficit is projected at near $1 trillion, including deficit-financed tax cuts.
Reporting by Swati Pandey and Wayne Cole; Editing by Richard Pullin and Eric Meijer