Wages and debt remain a concern for RBA

Melissa Jenkins
(Australian Associated Press)

The central bank has opted for the safe bet and left interest rates on hold, as it continues to balance its expectations of improving economic growth with weak wages growth and high household debt.

Leaving the cash rate unchanged at 1.5 per cent for a 15th consecutive month, Reserve Bank of Australia governor Philip Lowe said the bank's forecasts for the economy's growth were largely unchanged.

But he also highlighted slow wages growth and rising debt levels.

"One continuing source of uncertainty is the outlook for household consumption," Dr Lowe said in a statement on Tuesday

"Household incomes are growing slowly and debt levels are high."

Dr Lowe said the RBA board expects inflation, which remains below the bank's target range of two to three per cent, to lift gradually as economic growth improves.

"In underlying terms, inflation is likely to remain low for some time, reflecting the slow growth in labour costs and increased competitive pressures, especially in retailing."

The RBA governor also noted the recent easing in Sydney house prices, but said prices remain little changed elsewhere, and continue to rise in Melbourne.

Royal Bank of Canada chief economist Su-Lin Ong said the RBA had, to some extent, played down recent economic data, including soft retail sales and lower than expected inflation.

"Given the recent developments, this discussion was not as dovish as it could have been," she said.

The RBA remained upbeat about the jobs market and observed that both employment and labour force participation have been rising, along with an improved outlook for non-mining investment.

AMP Capital chief economist Shane Oliver said the RBA had to balance its forecasts of improving stronger growth and employment against ongoing low inflation, weak wages growth, uncertain consumer spending and a high Australian dollar.

"The RBA remains stuck between a rock and a hard place on interest rates," he said.

"We remain of the view that the RBA will leave the cash rate on hold until a probable rate hike late next year."

The Australian dollar rose to a two-day high of 76.95 US cents following the RBA's rate announcement, though quickly fell back and ended the local session at 76.80 US cents.