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Strong dollar imperils economy and jobs, RBA warns

03 August 2017

"It is also weighing on the outlook for output and employment".

In Tuesday's rates decision for August, which saw no change, RBA governor Philip Lowe wrote that the stronger currency was hurting workers and constraining economic activity. 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.

Although they noted that "an appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than now forecast", at its current level, the AUD has not materially affected their forecasts.

Commonwealth Bank chief economist Michael Blythe said the RBA's view on on the Australian dollar had changed, from seeing it as a complicating factor for the economy to one that could slow growth.

With the AUD having rallied by 4 cents against the Dollars since the last board meeting, the central bank could easily have shifted to more aggressively jawboning the currency if they were anxious.

The RBA is also expected to keep in place its upbeat growth forecasts for gross domestic product when it publishes its revised outlook for the economy on Friday.

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

Dr Lowe said that Chinese economic growth has strengthened, bolstered by stronger spending on infrastructure and property construction, although he noted that high debt levels continued to present a medium-term risk.

The Australian dollar climbed from $0.76 to above $0.80 over the last month, partly due to the weakness in the greenback.

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.

The Reserve Bank signalled that it was not particularly anxious about housing prices, saying they were rising briskly in some markets, albeit more slowly. "Recent declines in the U.S. dollar and strengthening commodity prices have placed added pressure on the Australian dollar, which may reduce export demand". Sydney and Melbourne house prices have added more than 10 percent over the past year, but low interest rates made an unpredictable frenzy among real-estate investors seeking to trade in tax breaks. "It implies they're a long way from raising interest rates".

"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", the bank said. Rent increases remain low in most cities.

Strong dollar imperils economy and jobs, RBA warns