Australia holds interest rates as Lowe says unemployment key to outlook

Bloomberg

Australian central bank chief Philip Lowe kept his head below the parapet by keeping interest rates unchanged less than two weeks out from an election, saying lower unemployment is needed to drive faster inflation.
Lowe left the cash rate at 1.5 percent — where it has stood since he took the helm in September 2016 — after economists and money markets were almost evenly divided on the decision. This was the governor’s first meeting where an adjustment was in play, with a swathe of economists switching to calling cuts following weak first-quarter inflation.
The board “recognised that there was still spare capacity in the economy and that a further improvement in the labor market was likely to be needed for inflation to be consistent with the target,” Lowe said in his statement. “Given this assessment, the board will be paying close attention to developments in the labor market at its upcoming meetings.”
The Reserve Bank resisted intensifying pressure to ease as it sought to avoid entering the pointy end of an election campaign. Lowe is holding fast to his view that solid hiring will tighten the labor market sufficiently to spur wages growth. That’s despite a slowing economy and weaker consumer-price growth.
The Australian dollar rose after his announcement, buying 70.41 US cents in Sydney, compared with 70.01 cents before the statement. Three-year bonds tumbled, sending yields up 7 basis points to 1.31 percent, the steepest increase since April 2018. Rates traders pushed back expectations for a cut, fully pricing in the first one in September, after being certain a reduction was coming in July.
“The main domestic uncertainty continues to be the outlook for household consu- mption, which is being affected by a protracted period of low income growth and declining housing prices,” Lowe said.