×

Australia's central bank is upbeat on the economy, but warns on further rise in currency

Australia's central bank is more confident that economic growth will accelerate over the next two years but still expects little improvement in unemployment or wage growth, suggesting policy is on hold for some time.

In its 66-page statement on monetary policy on Friday, the Reserve Bank of Australia also warned that any further rise in the local dollar would weigh on growth and inflation.

John Phillips | Digital Editor | CNBC

The Aussie has surged almost 7 percent since June, to atop 80 U.S. cents.

An even higher currency would threaten the RBA's projections of around 3 percent growth in the A$1.7 trillion economy over the next couple of years.

"Further exchange rate appreciation would tend to generate a slower pick-up in economic activity and inflation than currently forecast," Governor Philip Lowe said.

Core inflation — the main focus for policy makers — is expected to climb to the bottom end of its long-term target band of 2-3 percent over the second half of 2017, from previous projection of early 2018.

Inflation has remained below the target since the start of 2016 and was the single biggest reason for the central bank to cut interest rates to an all-time low of 1.50 percent last year.

The bank noted utility prices were now set to rise more than first expected over the next few years, adding significantly to headline consumer prices.

Yet wage growth is crawling at the slowest pace on record and is a key source of uncertainty for the RBA's inflation forecasts.

"Wage growth is expected to remain subdued," Lowe said. "The experience of some economies that are already close to full employment suggests that declining spare capacity might take some time to flow through to wage and thus price inflation."

The bank welcomed recent strength in employment but still forecast little improvement in unemployment, with the jobless rate seen at just under 5.5 percent out to the end of 2019.

Since the start of the year, around 165,000 full-time jobs were created while average hours worked and labor force participation have both risen.

Corporate profits are surging while measures of business confidence and conditions are the strongest since 2008 as the drag from a once-in-a-generation mining boom comes to an end.

Also boosting the RBA's optimism is a broad-based pick up in global growth since the start of this year while the price of Australia's single biggest export earner - iron ore - has been climbing, boosting the country's terms of trade.

Indeed, the country has run trade surpluses in seven of the last eight months.

Still, consumers are saddled with a mountain of debt.

The RBA is worried that incomes are rising at a slower rate than the jump in household indebtedness, a trend that is hurting consumer spending.

Household debt to income has sky-rocketed to a record 190 percent as more Australians speculate in the property market, particularly in Sydney and Melbourne where prices have broadly doubled since 2008.

While regulators have taken measures to curb reckless lending in the property market and there are early signs of a slowdown, the RBA is not fully convinced the market is cooling.