RBA Suggests Rates May Not Rise Until Late 2019, if Not Sometime in 2020

The Australian Dollar is trading higher early Tuesday following the release of the latest interest rate decision by the Reserve Bank of Australia (RBA). It’s not the central bank decision that’s driving the price action, but rather rising demand for risky assets.

At 0646 GMT, the AUD/USD is trading .7419, up 0.0030 or +0.40%.

The RBA held its interest rate at a record 1.50% as policymakers delivered a more sobering take on the global economy.

In addition to holding its benchmark interest rate at a record low, Reserve Bank Governor Philip Lowe and his board of policymakers amended his language on China’s economy in his accompanying statement, saying growth “has slowed a little” instead of growing solidly. He noted the easing policy of the People’s Bank of China while heeding risks in the financial sector.

The RBA also “suggested that interest rates won’t rise for a while yet. Our more cautious forecasts suggest that rates may not rise until late in 2019, if not sometime in 2020.”

“The bank’s central forecast for the Australian economy remains unchanged,” Lowe said. “GDP growth is expected to average a bit above 3 percent in 2018 and 2019. This should see some further reduction in spare capacity.”

Lowe also said the outlook for the labor market “remains positive” and predicted a further gradual decline in unemployment “over the next couple of years to around” 5 percent.

“Wages growth remains low,” Lowe acknowledged. “This is likely to continue for a while yet, although the improvement in the economy should see some lift in wages growth over time. Consistent with this, the rate of wages growth appears to have troughed and there are increased reports of skills shortages in some areas.”

Finally, “The latest inflation data were in line with the bank’s expectations,” Lowe said. “The central forecast is for inflation to be higher in 2019 and 2020 than it is currently. In the interim, once-off declines in some administered prices in the September quarter are expected to result in headline inflation in 2018 being a little lower than earlier expected, at 1.75 percent.”

Before the release of the RBA’s interest rate decision, AIG released the results of its current Construction Index. The Australia construction sector accelerated in July, the latest survey from the Australian Industry Group revealed on Tuesday with a Performance of Construction Index score of 52.0. That is up from 50.6 and it moves further above the boom-or-bust line of 50 that separates expansion from contraction.

Japanese Yen

In Japan, households reduced spending for the fifth straight month in June, government data showed Tuesday, suggesting only modest growth in the second quarter.

The Japanese Yen showed little response to the news. At 0729 GMT, the USD/JPY is trading 111.337, down 0.071 or -0.07%.

Spending by households with two or more people fell 1.2 percent from a year earlier to $267,641 ($2,403), according to the Ministry of Internal Affairs and Communications. The annual figure matched the -1.2 percent estimate and came in better than the -3.9% previous reading.