SYDNEY (Reuters) - Australia’s central bank has stuck to its upbeat tune on economic growth, but heightened concerns about financial stability suggest interest rates will remain at record lows even as policy makers abroad turn hawkish.
Minutes of the Reserve Bank of Australia’s (RBA) June meeting showed soaring household debt in the country’s red-hot property market and weak wages growth were at the forefront of policy makers’ minds.
“The board judged that holding the accommodative stance of monetary policy unchangedat this meeting would be consistent with sustainable growth in the economy andachieving the inflation target over time,” the minutes showed.
“Members discussed how financial stability considerations bear onmonetary policy decisions, reviewing both the academic literature and policy experience in a number of countries, including Sweden and the United States.”
The central bank last cut interest rates in August 2016 to an all-time low of 1.50 percent. It has since stood pat, balancing the risk of record high household debt against tepid inflation and weak consumer spending.
Australia’s household sector is under severe strain with debt-to-income at a record high 189 percent while wages are crawling at the slowest pace ever. The share of national income going to households has shrunk to its smallest since 1964 while the savings rate has fallen to a 10-year low.
That is one reason the RBA is unlikely to hike official rates in the coming months as that would push up mortgage costs for already indebted Australian families.
Yet it fears easing further might only stoke further borrowing by investors to speculate in the housing market.
Late on Monday, Moody’s Investors Service cited high household indebtedness when downgrading 12 Australian banks, including the four largest lenders.
House prices in Sydney and Melbourne - two of the country’s hottest markets - have broadly doubled since 2009. There are tentative signs of a cooling off since April following tighter regulations on lending to property investors.
The RBA noted it would take time for the full effects of regulatory measures to show.
Australia’s super easy policy stance contrasts with some other global central banks who are in the mood to nudge interest rates higher. Three of eight policymakers at the Bank of England voted last week to raise rates, while the Bank of Canada surprised by suddenly holding out the prospect of hiking to tamp down their housing market.
The U.S. Federal Reserve has already moved rates higher twice this year as economic growth picked up and the labour market tightened.
RBA Governor Philip Lowe has been doggedly upbeat about the outlook for Australia’s A$1.7 trillion economy, but conceded there were hurdles ahead.
The economy expanded by a disappointing 0.3 percent in the first quarter of the year, while annual growth was the slowest since 2009 at 1.7 percent.
However, a stabilisation in mining investment after years of steep falls, better commodity prices, and the country’s biggest-ever home building boom will likely boost future growth.
The labour market is also strengthening with the unemployment rate at a 4-year low of 5.5 percent. Forward-looking indicators of labour demand have also been positive.