RBA warns high dollar may slow growth

Reserve Bank of Australia governor Philip Lowe. The RBA should focus solely on its regulatory responsibilities

RBA monetary policy statement incoming: Markets eye comments on AUD strength

While the U.S. Federal Reserve chair Janet Yellen spent much of July talking down the U.S. dollar and timeline for rate hikes, the RBA chose to talk the Australian dollar higher in its July 18 minutes to its monetary policy meeting.

The central bank's monetary policy statement is due 12:30pm HK/SIN.

Our central case is that growth will pick up to an above-trend pace in H2 2017, underlying inflation will lift to be back in the 2-3% target band and the RBA will deem, in early 2018, that it then has little reason for its very accommodative cash rate setting. According to RBA, one source of uncertainty for domestic economy is the outlook for consumption. Retail sales have picked up recently, but slow growth in real wages and high levels of household debt are likely to constrain growth in spending.

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"The Australian dollar has appreciated recently, partly reflecting a lower U.S. dollar".

Instead, he said, "the post-meeting statement reported that the forecasts were largely unchanged and that growth was still expected to pick up to around 3 per cent". The various forward-looking indicators point to continued growth in employment over the period ahead.

PMI's are now broadly range bound around the 53-4 level for all three sectors and they are expected to remain around those levels. In some other markets, prices are declining.

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While this had been largely priced in by investors, the RBA's warning that the 'Aussie's recent strength has been placing pressure on the Australian economy caused the antipodean currency to relinquish almost all of its overnight gains.

There is also likely to be a short-term pick up in inflation, as measured by the consumer price index, as higher electricity and tobacco prices flow through. In his accompanying statement, Lowe said while the bank was sticking to its quarterly forecasts - which will be updated in three days' time - he also made it clear that further Aussie ascension will slow the track of economic growth and inflation. But Dr Lowe noted that "a factor working in the other direction is increased competition from new entrants in the retail industry". In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. Lowe said that growth in housing debt has been beating the sluggish climb in household incomes. While some economists might argue high iron ore and coal prices justify a stronger Aussie dollar, the reality is mining companies aren't going to use the windfalls to invest and hire Down Under.

The jump appeared to be largely driven by increased foreign demand for British goods as the weaker Pound makes good produced in the United Kingdom more attractive to overseas buyers.

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