Australia’s Lowe to Keep RBA Rates Unchanged due to Reflation

The Australian economy is currently involved in reflation wherein economic growth and inflation accelerated, pushing away the central bank while flat wages and strong Aussie kept prices under control.

On Tuesday, Bank Governor Philip Lowe together with the board of the Reserve Bank of Australia is expected to maintain the interest rates at its 18th-month lows during the first policy meeting for this year, based on the money markets speculations and economists’ predictions. On the other hand, there is a high chance for some tightening prior the last three months of the year, while a vocal minority assumed policymakers will remain steady throughout the entire year.

The record highs were partially gained by the neutralized increased of population growth, half a percentage point of the unemployment rate and the unprogressive wages. Moreover, the business investment had a reversal with adjustments since the fat years of Chinese-driven mining expansion that pulled down the recovery against other economies.

As the interest rates of the central bank accelerated its decline, the house prices in Sydney also begin to drop due to macroprudential regulation that discouraged investors. With the RBA being constrained, the Aussie dollar appreciated by 5 percent during the final board meeting in December and February 2nd. This further reduced the margins of exporters due to higher price cost of products and cost-cutting of imports that tightened the inflation.

The average inflation target of the Australian bank was 2 to 3 percent, while the data published last week indicated an annual estimate of 1.9 percent in Q4. Moreover, Deutsche Bank AG’s Chief Economist Adam Boyton described price growth as “narrowly based”. This does not include fuel, utilities, health and education and the 0.6 percent inflation in the previous year.

After the release of data, traders became uninterested and reduced their expectations by 10 percentage points with regards the rate hike scheduled in August. While assessment for November appears to be a month for tightening with a 68 percent possibility. The median estimate of experts is about the rate increase in the fourth quarter.

The calculated world’s GDP was 3.3 percent from 2016, this is the strongest and continuous development after a decade of financial depression, JPMorgan noted. Contrarily, the average GDP of Australia came in at 2.5 percent in the mid-2016 which showed a downturn in the past years led by the reduction in mining investment.