SYDNEY – Australia's central bank on Tuesday ramped up its warnings over recent strength in the Australian dollar saying it is becoming a potential brake on economic growth and prices.
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The comments come as the Reserve Bank of Australia left its cash rate target on hold at a record low 1.5%, completing a full year with no change in its main policy settings.
"The Australian dollar has appreciated recently, partly reflecting a lower U.S. dollar. The higher exchange rate is expected to contribute to subdued price pressures in the economy," Reserve Bank Gov. Philip Lowe said.
"It is also weighing on the outlook for output and employment. An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast," he added.
The Australian dollar slipped to around US$0.8005 on the remarks, from US$0.8020, before rebounding.
Gov. Lowe indicated that the central bank will remain sidelined for some time, allowing inflation to rise gradually back to its desired 2% to 3% target band.
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"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," he said.
The RBA has expressed increasing concern that the Australian dollar, which recently topped its highest levels against the U.S. dollar in more than two years, has become a potential brake on growth.
Higher commodity prices, weakness in the U.S. dollar and some lingering speculation that the RBA might take a more hawkish view on policy are among the factors lifting the Aussie dollar.
For a central bank that is seeking stronger GDP growth and higher inflation, the loss of global competitiveness from a rising currency is problematic.
Despite the bank's concern over recent strength in the Australian dollar, the broader economy has improved in recent months.
Unemployment has fallen, led by full-time job creation over more causal positions, while business surveys remain bullish.
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.
-Write to James Glynn at firstname.lastname@example.org
(END) Dow Jones Newswires
August 01, 2017 01:00 ET (05:00 GMT)