Australia holds key rate, wagers property will lift spirits


  • Economy
  • Tuesday, 05 Nov 2019

Reserve Bank chief Philip Lowe and his board left the cash rate at 0.75% in Sydney as they monitor the ongoing impact of three reductions since June. The decision was predicted by money markets and economists and comes as policy makers struggle to accelerate economic growth and rekindle inflation.

SYDNEY: Australia kept interest rates unchanged Tuesday, betting that a rebound in property prices will increase household wealth and confidence and see consumers more willing to part with their cash.

Reserve Bank chief Philip Lowe and his board left the cash rate at 0.75% in Sydney as they monitor the ongoing impact of three reductions since June. The decision was predicted by money markets and economists and comes as policy makers struggle to accelerate economic growth and rekindle inflation.

"Given global developments and the evidence of the spare capacity in the Australian economy, it is reasonable to expect that an extended period of low interest rates will be required, ” Governor Lowe said in a statement announcing the decision. The board "is prepared to ease monetary policy further if needed to support sustainable growth in the economy.”

Australia gained much-needed breathing space in its easing cycle when the Federal Reserve signaled last week it was pausing rate cuts. That is likely to cool upward pressure on an Aussie dollar that Lowe has struggled to contain in order to keep his nation’s exporters competitive and hiring.

While the RBA’s three-quarters of a percentage point of rate cuts -- the same as the Fed -- and Australian government tax rebates have failed to lift flagging consumer spirits, monetary policy easing has been a boon for housing.

Prices in Melbourne surged 2.3% in October, the biggest monthly gain in almost 10 years, and have jumped 6% since bottoming in May. Sydney isn’t far behind, advancing 1.7% last month and rebounding 5.3% since May.

Yet that wealth effect hasn’t translated into improved sentiment: consumer confidence has fallen in four of the five months since the RBA resumed easing; retail sales, meanwhile, are miserable and rose just 0.2% in September from a year earlier and actually fell 0.1% in volume terms in the third quarter.

Lowe said today the central scenario is for the economy to expand around 2.25% this year -- a quarter-point less than forecast three months ago -- and then "gradually to pick up” to around 3% in 2021, in line with its August assessment. No figure was provided for 2020. The RBA will release its updated quarterly forecasts Friday.

"The low level of interest rates, recent tax cuts, ongoing spending on infrastructure, the upswing in housing prices in some markets and a brighter outlook for the resources sector should all support growth, ” the governor said. He reiterated the outlook for consumption remains the main domestic uncertainty.

In a new addition, Lowe added that,"other sources of uncertainty include the effects of the drought and the evolution of the housing construction cycle.”

As has been the case for some time, Australia’s economy is being supported by one of the fastest growing populations in the developed world. But that’s proving a problem for the jobs market, where a surge in hiring has been mainly met by new entrants to the labor force, keeping unemployment above 5%. Lowe is trying to push down the jobless rate in order to spur wage growth and revive inflation.

The RBA targets consumer-price growth of 2-3% over time and the government announced today it was sticking with that framework.

Offshore, key trading partner China continues to slow and instability from Brexit to Hong Kong is weighing on global growth. The bright spot is increasing signs of a preliminary U.S.-China trade deal.

The currency is holding below 70 U.S. cents, and policy makers will want to keep the pressure on the Aussie to aid growth, particularly as the government is disinclined to add stimulus to the economy. The Aussie was little changed after the decision, trading at 69.03 U.S. cents at 3:21 p.m. in Sydney. - Bloomberg


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