Australia holds rates at record low, mum on policy outlook

PUBLISHED : Tuesday, 03 September, 2013, 1:52pm
UPDATED : Tuesday, 03 September, 2013, 1:54pm

Australia’s central bank kept its cash rate at a record low of 2.5 per cent on Tuesday, a widely expected decision given it was just a month since the last easing and only days before national elections, while subdued data kept alive the chance of further cuts.

The Australian dollar rose as the market had expected a more dovish tone from the Reserve Bank of Australia (RBA) after its monthly policy meeting.

Instead, the central bank was less than forthcoming on the prospects of further action.

“The Board will continue to assess the outlook and adjust policy as needed to foster sustainable growth in demand and inflation outcomes consistent with the target,” was the boilerplate statement from RBA Governor Glenn Stevens.

The central bank cut rates in May and August in large part because a long boom in mining investment has peaked and spending by other sectors has yet to step up and fill the gap.

Another move this month always looked unlikely so soon after the last easing and with a Federal election just four days away. The Labor government of Prime Minister Kevin Rudd is trailing badly in the polls and seems likely to lose to the conservative opposition led by Tony Abbott.

All 23 analysts in a Reuters poll expected no change in policy this week, though many still favoured a further easing in coming months.

Financial markets imply around a two-in-three chance of a cut to 2.25 per cent by Christmas, and there is scant hint of a tightening priced in for at least the next year.

The RBA’s Stevens also reiterated his wish to see a lower local currency. The Australian dollar has dropped 15 per cent since April, bringing a much-needed boost to export earnings while lessening competitive pressure on manufacturing.

Since many of Australia’s resource exports are priced in US dollars, a lower currency delivers a big windfall to miners’ earnings and profits.

The lucrative impact was evident in the RBA’s measure of commodity prices, which jumped to a 15-month high in August when measured in Australian dollars.

Stevens, then, was unlikely to have been pleased by the market’s reaction, which was to push the local currency up about half of one US cent to US$0.9040.

The case for a continued easing bias by the RBA should be underlined by figures on gross domestic product (GDP) due on Wednesday.

Analysts expect only another modest increase of 0.6 per cent in the second quarter, while annual growth of 2.5 per cent would again be short of the 3.25-3.5 per cent they consider normal.

Ever since the global financial crisis, consumers have become more careful with their money choosing to save more and borrow less, a painful sea change for housing and retailing.

There are signs low mortgage rates are working to revive the housing market. Approvals to build new homes surged 10.8 per cent in July, more than making up for two months of weakness. Home prices were up over 5 per cent in the year to August, which should underpin household wealth and sentiment.

All of which is important as home construction has large multiplier effects on the economy, from all the building trades to the materials, furnishings, electronics and such.

Retailers, however, have yet to feel the benefit. Retail sales disappointed for the fifth month running in July, edging up a bare 0.1 per cent, data showed on Tuesday.

“The election, warm winter weather and absence of price growth are the three fundamental restraints on the value of retail spending,” said Savanth Sebastian, an economist at CommSec.

“The low interest rate environment is ensuring household budgets are looking a lot more attractive; however the decision by consumers to hold off on spending would be concerning the Reserve Bank.”