Australia's central bank held its main interest rate steady in the face of below-target inflation caused by lower oil prices and a stronger domestic currency.
The Reserve Bank of Australia (RBA) said it expected the higher exchange rate between the Australian dollar and its US counterpart was expected to keep price pressures subdued but was also weighing on the outlook for output and employment.
RBA rate call
Its cash rate was left unchanged at 1.5% – a historic low – as consumer price inflation grew at just 1.9% in June, falling below the bottom band of the RBA's 2-3% target range.
Forecast for growth were unchanged. The RBA said it expected annual gross domestic product of around 3% over the next couple of years.
The bank noted that a transition to lower levels of mining investment in Australia following the metal prices boom that peaked in 2012 was nearly complete.
Low wage growth
Also helping keep a lid on inflationary pressures was average wage growth – a factor that continues to hamper consumer spending and price growth in many major economies.
The bank said in its statement: "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."
Since the start of this year the Australian dollar is up nearly 5% against the US dollar – largely, the RBA noted, a result of weakness in the US currency.
But the Aussie's relative strength has subdued price pressures. The currency is also up 6.6% against the renminbi – the currency of China, Australia's largest trading partner.
A higher exchange rate means both its exports comparatively more costly. Higher import costs too, discourage consumer spending on overseas goods.
Kate Hickie at Capital Economics said: "We suspect that both growth and inflation will ultimately turn out lower than the RBA anticipates. As such, we think that interest rates will remain on hold throughout 2017 and 2018."
The Australian dollar fell following the decision to keep rates on hold, but recovered some ground through the morning. By the time of the European markets open, the Aussie was flat against the US dollar at A$0.8003.
Stock markets, however, were buoyed by the prospect of continued low interest rates. The benchmark S&P/ASX 200 gained 0.9% to 5,772.37.
"The Australian dollar above A$0.80 looks expensive, but without action from the central bank, yield differentials will continue to be the primary driver for the currency pair," said Hussein Sayed chief market strategist at FXTM.