Australia's central bank holds rates even as growth slows


The Reserve Bank of Australia (RBA) in Sydney, Australia, 01 September 2015. The RBA announced it will keep interest rates on hold at an historic low of two percent. The Australian bond market has been weighed down by a spike in oil prices, nervousness about China's pace of growth and fears of a September US rate rise. EPA

SYDNEY: Australia's central bank held rates steady at its last policy meeting of the year on Tuesday, but sounded a note of caution on economic growth after a run of soft data pointed to a possible contraction in the third quarter.

The Reserve Bank of Australia (RBA) kept rates at a record low 1.5% for a fourth straight month, following easings in August and May.

Yet governor Philip Lowe also dropped a reference to the economy expanding at potential in his statement, conceding annual growth would slow before picking up next year.

Policymakers have been sounding more optimistic on the economic outlook amid higher prices for key commodity exports, even though underlying inflation is stuck at record lows and job creation has disappointed.

"The RBA is certainly on watch at this stage," said JP Morgan analyst Tom Kennedy. "I do think, though, that for the next meeting in two months... the burden is on the data to improve a little bit or stabilise. And if that doesn't happen then the RBA could consider lowering the cash rate early in 2017." 
The RBA holds its first meeting in the New Year on Feb 7.

Australia's gross domestic product is due on Wednesday and analysts now fear it could show a small contraction, the first since early 2011, which means the RBA may have to downgrade its growth forecast for the A$1.6 trillion economy.

A weak inflation reading next month would open the door for a possible easing in February.

The risk of a negative GDP number was enough to pull the local dollar down a quarter US cent to US$0.7450.

Interbank futures still suggest the market sees scant chance of another cut in rates for the next few months, though any thought of a hike has also been priced out.

"Some slowing in the year-ended growth rate is likely, before it picks up again. The outlook for business investment remains subdued, although measures of business sentiment remain above average," governor Lowe wrote.

Underlying inflation is stuck at 1.5% and seems likely to remain below the RBA's 2% to 3% target band for another year or more.

Employment growth has also disappointed in recent months, while being heavily skewed toward part-time jobs.

A much-needed boom in home building also looks to have peaked after approvals for new projects collapsed in October.

However, a chief argument against further stimulus is a recent acceleration in house prices in Australia's two largest cities, Sydney and Melbourne.

Lowe highlighted the trend by noting that prices in some markets "have been rising briskly" while housing credit has picked up.

Home prices rose for the 11th straight month in November with annual growth in prices accelerating to 9.3%, from 7.5% in October, data from property consultant CoreLogic showed last week. - Reuters

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