Australia’s central bank left its benchmark interest rate unchanged at a record low, saying earlier cuts are still filtering through the economy and already driving up asset prices.
Governor Glenn Stevens and his board kept the overnight cash-rate target at 2.5 percent, the Reserve Bank of Australia said in a statement today in Sydney, as forecast by all 33 economists surveyed by Bloomberg. The local dollar rose even as Stevens said “a lower level of the currency than seen at present would assist in rebalancing growth in the economy.”
Traders pared bets on another rate cut this year, and data earlier today showed retail sales climbed faster than forecast in August, while home prices advanced to a record last month. The RBA’s two-year easing cycle designed to rebalance the economy away from waning mining investment may be approaching its end as household and business sentiment improves.
“The message is entirely consistent with a neutral stance,” said Joshua Williamson, a senior economist at Citigroup Inc. in Sydney. “There’s a bit more emphasis on reminding people that the full effects of the interest rate cuts are going to take time to filter through to the economy. So it just suggests they’re giving the data the time to react.”
The central bank may be hesitant to further stoke the property market. Home prices in Australia’s biggest cities rose 3.7 percent in the three months through September, according to the RP Data-Rismark Home Value Index. That’s been spurred by the 2.25 percentage point reduction in rates since late 2011.
“The easing in monetary policy since late 2011 has supported interest-sensitive spending and asset values,” Stevens said in the statement. “The full effects of these decisions are still coming through, and will be for a while yet.”
Yields on December cash-rate futures rose 4.5 basis points, the most in almost two months, to 2.41 percent, data from the Australian Securities Exchange show. That indicates traders see a better than 60 percent chance the RBA will leave borrowing costs unchanged through year-end.
The currency rose to 93.97 U.S. cents at 3:21 p.m. in Sydney, from 93.38 before the decision. It climbed 4.7 percent last month, the most in more than a year, as the Federal Reserve maintained asset purchases.
“The Australian dollar rose recently, but is still about 10 percent below its level in April,” Stevens said. “The economy has been growing a bit below trend over the past year. This is expected to continue in the near term as the economy adjusts to lower levels of mining investment. The unemployment rate has edged higher.”
Employers unexpectedly cut payrolls by 10,800 in August and unemployment climbed to four-year high of 5.8 percent as fewer people sought work, government data showed.
“Households’ confidence to leverage into a strong property boom will be affected by their assessments of job security and perceptions of debt levels,” Bill Evans, chief economist at Westpac Banking Corp., said in a research report before the decision. “Note that the savings rate actually increased in the June quarter indicating that the consumer remains cautious.”
Since a Sept. 7 election won by Tony Abbott’s coalition, a Westpac and Melbourne Institute survey showed consumer confidence rose 4.7 percent last month to the highest level since December 2010 as the prospect of a change of government and lower rates boosted sentiment. Business confidence surged in August to the highest level since May 2011, with sentiment lifting in all industries, according to a survey from National Australia Bank Ltd.
The RBA last week sounded a note of caution on gains in housing prices in its financial stability review, saying property buyers need to have “realistic expectations of future dwelling price growth.”
Sydney will lead a jump in home prices as demand driven by low rates meets a lack of supply, according to SQM Research Pty. Prices across major cities may rise as much as 11 percent on average in 2014 in SQM’s base-case scenario, which assumes no more than one 25 basis-point RBA rate cut, it said.
“Inflation has been consistent with the medium-term target,” Stevens said in the statement. “With growth in labour costs moderating, this is expected to remain the case over the next one to two years, even with the effects of the lower exchange rate.”