RBA Extends Rate Pause at 3% as Hurdle for Action Rises: Economy
Australia’s central bank kept its benchmark interest rate unchanged to match a half-century low in response to a recovery in household spending as traders pushed out bets on the next reduction in borrowing costs.
Governor Glenn Stevens left the overnight cash-rate target at 3 percent, saying “recent information suggests that moderate growth in private consumption spending is occurring,” according to a Reserve Bank of Australia statement in Sydney today. “There are a number of indications that the substantial easing of monetary policy during late 2011 and 2012 is having an expansionary effect.” All 28 economists predicted the result.
The decision reflected improved consumer confidence, retail spending and hiring after 1.75 percentage points of rate cuts in the 14 months through December. Policy makers are trying to rebalance growth toward industries including construction as the RBA predicts mining investment will peak this year and the high currency hurts manufacturing and slows inflation.
“The tone of the statement indicates the central bank is becoming more comfortable with keeping the rates where they are,” said Kieran Davies, chief economist at Barclays Plc in Sydney, who forecasts rates will remain unchanged for the rest of the year. “The inflation reason it gives for maintaining an easing bias is unchanged. Even though it has kept the bias, its hurdle toward being prompted into action would be very high.”
Stevens noted the inflation outlook “would afford scope to ease policy further, should that be necessary to support demand,” and said an “accommodative stance” is appropriate.
Traders are pricing in a 55 percent chance the RBA will remain on hold until August, up from 45 percent yesterday, swaps data compiled by Bloomberg show. The three-year government bond yield climbed 1 basis point to 2.89 percent. The Australian dollar was little changed at $1.0461 at 3:36 p.m. in Sydney, from $1.0460 before the decision.
“The exchange rate, which has risen recently, remains higher than might have been expected, given the observed decline in export prices,” Stevens said in today’s statement. “The demand for credit has also remained low thus far, as some households and firms continue to seek lower debt levels.”
Australia’s household debt-to-income ratio stands at 148 percent, compared with a record 153 percent in late 2006, RBA data show. A private report today from the RP Data-Rismark home value index showed dwelling values across Australian capital cities climbed 2.8 percent in the first three months of this year, the biggest quarterly increase since 2010.
Stevens, noting the stimulus on the economy from the prior rate reductions, said “further such effects can be expected to emerge over time.”
Since the RBA’s last policy meeting, government and private data showed rate cuts are beginning to bear fruit. The economy expanded 3.6 percent in 2012; employers added 71,500 jobs in February, the most since 2000; and consumer confidence rose in March to the highest level since December 2010.
In contrast, business confidence dropped in February, home- loan approvals fell in January and the trade deficit widened as exports declined. The global outlook is also more fragile.
Cypriot government officials will seek easier bailout terms in talks with representatives of the European Union and International Monetary Fund today, before a meeting of euro-area finance officials later this week.
Spain and Italy will report their latest monthly unemployment data. Reports on the euro area will probably show manufacturing contracted in March while the jobless rate rose in February, according to Bloomberg News surveys before data due today. U.S. factory orders for February may show an expansion after a 2 percent decline in January, a separate Bloomberg survey showed.
Australia’s economy and jobs market have been boosted by a “once-in-a-century” resource investment boom to meet commodity demand from developing nations including China. Policy makers are now trying to revive demand in other industries to avoid a growth gap.
“Looking ahead, the peak in resource investment is drawing close,” Stevens said today. “While the near-term outlook for investment outside the resources sector is relatively subdued, a modest increase is likely to begin over the next year.”
The Australian dollar’s trade-weighted index rose to 79.4 on March 27, the highest level since 1985, and climbed 2.6 percent over the past month against Group of 10 currency peers, the strongest gains across the Bloomberg Correlation-Weighted Indexes. The so-called Aussie’s record nine-month stretch above parity with the greenback is damping import costs, helping keep inflation below the middle of the range targeted by the RBA.
“If the Reserve Bank was to cut rates in the next few months it would likely be prompted by fresh global turmoil, especially combined with evidence of weaker U.S. and Chinese growth, low domestic inflation and a high Australian dollar,” said Craig James, a senior economist at a unit of Commonwealth Bank of Australia (CBA), the nation’s biggest lender.
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