RBA Still Not Ruling Out Rate Cut

A slump in Australian retail sales in July and August is no cause for immediate alarm, but a response through interest rates could be warranted if consumption across the economy loses momentum entirely, according to central bank board member Ian Harper.

While Mr. Harper also pointed to positive economic data out recently, including employment and investment figures, his comments suggest the Reserve Bank of Australia will likely remain cautious for longer-than-expected, with the possibility of another rate cut not completely ruled out.

"The thing that is causing an issue for us [the RBA board] is slow growth in wages, which is feeding into slow growth in household income," Mr. Harper said in an interview with The Wall Street Journal. "If you start to lose that momentum, that might be the basis of some sort of policy action," he said.

Retail sales fell 0.6% in August, the biggest drop since 2013. It followed a 0.2% fall in July, shifting momentum in the opposite direction to economists' expectations, and fanning fears that record household debt and stagnant wages growth will sideline consumers and slow the economy.

Mr. Harper said the latest retail sales outcome was disappointing, but not alarming.

"It is yet another indication that we are no out of the woods," he added.

Incomes in Australia are growing at their slowest pace in a quarter of century, and the International Monetary Fund recently highlighted Australia's high levels of household debt in a global report on financial stability.

Household debt is reaching its upper limits, while there are also limitations on how much people can rein in saving to sustain their spending, he added.

Still, Mr. Harper noted that retail sales are only one component of consumption, which itself has been growing at a "respectable pace."

More broadly, trends in the economy have been positive of late, with employment lifting in all states, even in depressed mining regions, while the outlook for investment is looking brighter, he said.

But progress in the economic recovery, which the RBA forecasts will soon produce on-year GDP growth rates 3.0% or more, is "painfully slow," he said, with no signs of inflation or strong wage growth despite employment growth and a pickup in investment. The level of the Australian dollar also remains an inhibitor to growth, even after recent falls, Mr. Harper said.

"You wouldn't want to be jumping the gun and tightening too quickly," he said.

Write to James Glynn at james.glynn@wsj.com

(END) Dow Jones Newswires

October 05, 2017 22:07 ET (02:07 GMT)