RBA warns high dollar may slow growth

RBA warns high dollar may slow growth

RBA warns high dollar may slow growth

In his official statement regarding August's monetary policy decision, Governor Philip Lowe said the recent inflation data was largely what the Reserve Bank had expected. Commodity prices have generally risen recently, although Australia's terms of trade are still expected to decline over the period ahead.

The Australian bonds remained flat Wednesday as investors remained sidelined in any major trading activity ahead of the Reserve Bank of Australia's (RBA) quarterly statement on Friday, which will provide updates on key economic indicators such as gross domestic product and inflation. Citing complications to the evolution of the economy, the statement went further to explicitly address commonly held fears in respect to the deflationary impact of the elevated Aussie which the bank believes will "contribute to subdued price pressures" and have a knock on effect on the wider economy through employment and exports.

In recent months, mortgage rates have been edging higher, especially for investors and interest-only loans.

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Since the start of this year the Australian dollar is up almost 5% against the USA dollar - largely, the RBA noted, a result of weakness in the U.S. currency. "It implies they're a long way from raising interest rates".

With the AUD having rallied by 4 cents against the Dollars since the last board meeting, the central bank could easily have shifted to more aggressively jawboning the currency if they were anxious.

Treasurer Scott Morrison's latest federal budget predicted the economy would grow at 2.75 per cent in 2017-18 and 3 per cent in 2018-19. "With inflation low and particularly wages growth very low, there is no need to raise rates for at least two years". Some pick-up in non-mining business investment is expected.

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And he did point to the disturbing trend that "growth in housing debt has been outpacing the slow growth in household incomes". Both CPI inflation and measures of underlying inflation are running at a little under 2 per cent. Inflation is expected to pick up gradually as the economy strengthens.

AMP Capital's chief economist Shane Oliver said developments in North Korea and continued instability in the White House may also cause some uncertainty on the Australian stock market. But Dr Lowe noted that "a factor working in the other direction is increased competition from new entrants in the retail industry".

"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.

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