Australia holds rate as currency drop offers export support

Bloomberg

Australia left its key interest rate unchanged at a record low on Tuesday as the currency’s recent decline aids the economy by offering exporters some insulation against global trade ructions.
Reserve Bank Governor Philip Lowe kept the cash rate at 1.5 percent, as expected by all economists and where it’s stood since August 2016. The Australian dollar this week dropped to its lowest level in more than a year, driven by increasing anxiety that a trade war could send shock waves through commodity markets that the nation depends upon.
“One uncertainty regarding the global outlook stems from the direction of international trade policy in the United States,” Lowe said in a statement. “There have also been strains in a few emerging market economies, largely for country-specific reasons.”
“Market volatility has picked up, though the RBA’s outlook remains unchanged from June. Importantly, progress on inflation is still seen to be gradual with wage growth remaining low for a while yet.
“We think the RBA will remain on hold well into next year,” said Tamara Henderson, Bloomberg Economics.
The RBA is prepared to be patient, making clear to firms and households it doesn’t intend to lift rates until the labor market tightens sufficiently to drive up wages and inflation. While the US economy is motoring and likely to accelerate as tax cuts juice growth, Australia is the most China-dependent developed economy and the prospect of rising protectionism between the world’s biggest economies is a serious external threat.
The local dollar was little changed following the decision, trading at 73.39 US cents at 3 p.m. in Sydney. It’s fallen 6 percent this year, the worst performer in a group of 10 currencies after the Swedish krona. “The Australian dollar has depreciated a little, but remains within the range that it has been in over the past two years,” Lowe said.
While a lower Aussie dollar supports Australia’s open, trade-reliant economy, it would probably need to fall into the 60s for a sustained period to really change the central bank’s calculations.