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RBA Holds Rate at Record Low to Spur Jobs Amid Rebalancing

Reserve Bank of Australia Governor Glenn Stevens
Glenn Stevens, governor of the Reserve Bank of Australia. Photographer: Patrick Hamilton/Bloomberg

The Reserve Bank of Australia kept its key interest rate at a record low and repeated it expects a period of steady borrowing costs amid below-trend growth.

The overnight cash rate target was held at 2.5 percent for a 12th month, Governor Glenn Stevens and his board announced in Sydney today in a largely unchanged statement. The decision was predicted by all 32 economists surveyed by Bloomberg News.

“The most prudent course is likely to be a period of stability in interest rates,” Stevens said, echoing statements this year. While inflation accelerated in the second quarter, lower wages growth “should keep inflation consistent with the target even with lower levels of the exchange rate,” he said.

The RBA has flagged a period of low rates as it tries to rebalance the economy toward industries including residential construction as the country’s mining investment boom wanes. The jobless rate climbed to 6 percent in June and confidence has been hit by government spending cuts announced in May. That’s weighing against rising house prices and faster inflation.

“Overall, we think that rate increases are a long way off,” said Daniel Martin, an economist at Capital Economics Asia Pte in Singapore. “The Australian dollar is still very strong. This all comes against a backdrop of slowing mining investment, which had been the economy’s main driver in recent years.”

Australian Dollar

The Australian dollar was little changed after the decision, trading at 93.33 U.S. cents at 2:44 p.m. in Sydney. It dropped 1.5 percent in July, ending a five-month 7.7 percent rally. It will fall to 87 cents by the second quarter of next year, according to the median of forecasts compiled by Bloomberg.

“The exchange rate remains high by historical standards, particularly given the declines in key commodity prices, and hence is offering less assistance than it might in achieving balanced growth in the economy,” Stevens repeated today.

In a July 3 speech in Hobart, the governor said “we think that investors are underestimating the likelihood of a significant fall in the Australian dollar at some point.”

The RBA’s financial easing has been aided as the nation’s banks reduced mortgage levels. The average rate on variable home loans, which about 85 percent of Australians borrowers are on, is 5.95 percent, the lowest since September 2009.

Lower Rates

Fixed rates have also dropped. Commonwealth Bank of Australia, National Australia Bank Ltd. and Westpac Banking Corp. last month cut their five-year fixed rates to 4.99 percent, a record low for CBA, the least in 20 years for NAB, and a five-year low for Westpac.

Still, Australia’s trimmed mean inflation -- the central bank’s preferred measure -- accelerated faster than forecast last quarter. House prices climbed 1.6 percent last month and are up 10.2 percent from a year earlier, underscoring economists’ bets that the next rate move will be higher.

“The increase in dwelling prices has been slower this year than last year, though prices continue to rise,” Stevens said today.

Goldman Sachs Group Inc. is the only institution surveyed that predicts a rate cut next month.

The governor, also on July 3, said that long before any rate increase is considered the board would probably “revert to the more normal formulation that the stable policy settings ‘remained appropriate’ or something like that.”

Australia’s trade deficit was A$1.68 billion ($1.57 billion) in June and May’s shortfall was revised to a wider-than-reported A$2.04 billion, a government report today showed.

The RBA will release its quarterly forecasts on Aug. 8 in its monetary policy statement.

Australia’s treasurer in May announced cuts to spending on welfare and the public service and a new tax on the highest paid. Consumer confidence fell to its lowest level since August 2011, prior to the central bank’s most recent easing cycle, after the budget’s May 13 release and has remained subdued since.

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