RBA warns high dollar may slow growth

Melissa Jenkins
(Australian Associated Press)

The central bank has warned that a rising Aussie dollar could slow the pace of economic growth and job creation.

Reserve Bank of Australia Governor Philip Lowe said on Tuesday the bank board had decided to leave the cash rate at 1.5 per cent, where it has now been for 12 months.

He said the economy was still expected to grow at an annual rate of three per cent for the next few years but stressed that forecast may change should the Australian dollar continue to rise.

The local currency was a touch over 76 US cents when the RBA met in July and was trading at around 80 cents when the board began its August meeting on Tuesday.

It rose in the minutes following the RBA’s 1430 AEST announcement to 80.35 US cents, though had fallen back to just above 80 US cents later in the day.

“The higher exchange rate is expected to contribute to subdued price pressures in the economy,” Dr Lowe said in a statement.

“It is also weighing on the outlook for output and employment.

“An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.”

Commonwealth Bank chief economist Michael Blythe said the RBA’s view on on the Australian dollar had changed, from seeing it as a complicating factor for the economy to one that could slow growth.

“This addition neutralises the more upbeat labour market commentary and will probably be interpreted as a shift in a dovish direction,” he said.

Dr Lowe also said consumption remains a source of uncertainty for the economy.

“Retail sales have picked up recently, but slow growth in real wages and high levels of household debt are likely to constrain growth in spending,” he said.

The governor noted jobs growth has been stronger over recent months and was expected to continue strengthening but said wages growth remains low and is expected to stay that way for some time.

Patersons Securities economic analyst Tony Farnham said Dr Lowe’s comments were a clear hint that the central bank’s consumer spending outlook could be lowered.

He said Dr Lowe’s reference to higher commodity prices against the backdrop of expected weaker terms of trade also indicated the RBA was unconvinced a recent bounce in commodity prices was sustainable.

Mr Farnham said the RBA was unlikely to raise rates this year, and the possibility of a further cut could not be dismissed.

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