By Swati Pandey
SYDNEY (Reuters) - Australia's central bank held rates at a record low on Tuesday and opened the door wider for future cuts if the jobs market fails to push unemployment lower as retailers suffered their worst quarter in seven years.
The Reserve Bank of Australia's (RBA) decision to hold rates wrongfooted some doves and sent the Aussie dollar rising 0.9 percent to a one-week top of $0.7048. Rates futures had a 36 percent chance of a cut on Tuesday.
Calls from some analysts for the RBA to ease policy at its May meeting had intensified after first-quarter inflation came in below expectations last month to undershoot the central bank's 2-3 percent target for 13 straight quarters.
In holding the cash rate, the RBA board "recognised that there was still spare capacity in the economy and that a further improvement in the labour market was likely to be needed for inflation to be consistent with the target," it added.
"Given this assessment, the Board will be paying close attention to developments in the labour market at its upcoming meetings," the RBA said.
The on-hold decision comes just 10 days before a closely-fought national election where Prime Minister Scott Morrison is campaigning on being a strong economic manager. The opposition Labor Party - the favourites to win - is championing workers rights, including stronger wage growth and personal tax cuts.
Helping the RBA's decision, the country's labour market has been going from strength to strength since 2017 with unemployment near an eight-year trough of 5 percent.
However, the jobless rate has barely budged in the past six months and the RBA expects it to stay around current levels over the next year or so before declining to 4.75 percent in 2021.
"It's all about the labour market," CommSec economist Craig James said.
"The Reserve Bank has an implicit bias in favour of lower interest rates. For rates to be cut there must be clear signs of deterioration in the labour market – fewer hours worked, higher jobless rate and continued weakness in wage growth."
A majority of the 42 economists polled by Reuters in late-April expected the RBA to cut rates to 1.00 percent by year-end. [AU/INT]
The RBA singled out the outlook for household consumption as the "main domestic uncertainty" led by a protracted period of low income growth and tumbling housing prices. It expects some pick-up in household disposable income growth which will in turn boost consumption.
Worryingly, earlier data on Tuesday showed retail sales rose a tepid 0.3 percent in March compared with an upwardly revised 0.9 percent in February.
For the first quarter, sales fell 0.1 percent in inflation-adjusted terms for its first negative reading since the September quarter of 2012 and followed an already sedate December quarter.
The soft result implies retail sales did not contribute to growth in Australia's A$1.9 trillion economy in the March quarter. It also adds to growing evidence of a rocky outlook, given household spending accounts for around 57 percent of annual gross domestic product.
The quarterly data showed the decline in volumes was led by household goods retailing - a sign Australia's heavily-indebted consumers are re-thinking spending decisions on big-ticket items as home prices tumble.
"These data bolster the case for a near-term rate cut and reinforces our view that the RBA will have to downgrade its outlook for growth," said Sydney-based National Australia Bank economist Kaixin Owyong.
The RBA acknowledged that consumer prices were "noticeably weaker" than anticipated although they were expected to pick up, albeit gradually.
($1 = 1.4286 Australian dollars)
(Additional reporting by Wayne Cole; Editing by Sam Holmes and Jacqueline Wong)