Australia's central bank sees danger in high household debt

SYDNEY: The head of Australia’s central bank gave the clearest signal yet on Wednesday that further cuts in interest rates would not be in the national interest as the danger of a debt-fuelled boom and bust was just too severe.

The Reserve Bank of Australia (RBA) has kept interest rates at a record low 1.5% since last easing in August, and Governor Philip Lowe hopes the current setting will be enough to deliver balanced economic growth.

“We set out to choose the path that, in our judgement, best promotes the welfare of the Australian people,” he said in a speech in Sydney, leaving little doubt that encouraging yet more borrowing would not meet that standard.

Lowe noted that high levels of debt combined with subdued wage growth were already making households wary of spending freely, a drag that was only set to get worse.

Data out on Wednesday showed annual pay rises were stuck at an all-time low of 1.9%, with ongoing weakness in private sector wages.

Lowe held out the hope that wage growth had finally bottomed, although the RBA’s liaison with firms suggested an upturn was not imminent.

A high and rising unemployment rate might add to the case for more stimulus, Lowe said, yet the bank was satisfied that the labour market was heading in the right direction.

“Trends in the labour market are the one to watch in 2017 rather than the inflation prints,” said Gareth Aird, an economist at Commonwealth Bank.

“We expect core inflation to continue to print below the Bank’s target but that won’t be enough for Lowe to cut the cash rate.” The futures market has almost priced out a chance of a rate cut this year, with some investors even toying with the idea of a rate hike by early 2018. — Reuters