Strong dollar imperils economy and jobs, RBA warns

Pound to Australian Dollar: Forecast For the Rest of the Week

Australia's dollar is now a key stumbling block to the economy emerging as a competitive services-driven exporter, prompting Reserve Bank of Australia (RBA) governor Philip Lowe to warn on the implications of extending its surge.

The meeting, scheduled at 12.00 BST on Thursday, August 3, is not expected to result in a change of policy, despite the relatively close vote of 5-3 not to raise interest rates at the previous meeting.

Central bankers all around the world are in a Machiavellian-style battle to keep their own currencies lower in order to boost competitiveness and inflation, while avoiding a Keynesian liquidity trap where monetary policy via lower rates fails to stimulate demand as intended. Although jobs growth is picking up and the unemployment rate is expected to edge lower over the next couple of years, wages growth remains feeble.

Dr Lowe also said consumption remains a source of uncertainty for the economy.

While retail sales have recently rose, slow growth in real wages and huge household debt may possibly restrain the increase in spending.

The Dow Jones was up 34 points but United States tech stocks dragged the broad S+P 500 down 0.1 per cent thanks to Amazon's weaker than expected results on Thursday night.

He said the economy was still expected to grow at an annual rate of three per cent for the next few years but stressed that forecast may change should the Australian dollar continue to rise.

According to data compiled by IHS Markit Britain's Manufacturing PMI jumped from 54.2 to 55.1 in July, rallying from a notable drop in activity in June and beating expectations of only a 0.2% rise.

Inflation is expected to pick up gradually as the economy strengthens. Commodity prices have generally risen recently, although Australia's terms of trade are still expected to decline over the period ahead. The bank observed that it is also weighing on the outlook for output and employment.

Chris Schade, senior business analyst at non-major lender MyState, said that below trend economic performance and a high Australian dollar meant the current interest rate setting remained appropriate. "It implies they're a long way from raising interest rates". Rent increases remain low in most cities. There has also been some tightening of credit conditions following recent supervisory measures to address the risks associated with high and rising levels of household indebtedness. Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.

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