RBA Says Aussie Still ‘Uncomfortably High’ as 2.5% Rate Kept

Australia’s central bank left its benchmark interest rate unchanged at a record low and said the currency is “still uncomfortably high,” even after a 4.6 percent decline since its previous meeting.

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 predicted by all 30 economists surveyed. Maintaining the same language as a month earlier, he said a lower Aussie “is likely to be needed to achieve balanced growth in the economy.”

Markets and economists predict the central bank will leave rates unchanged next year to avoid a growth gap emerging as mining companies plan fewer projects. Low borrowing costs are driving up home prices, suggesting the RBA may be reluctant to add to its 2.25 percentage points of rate cuts since late 2011.

“The hurdle to cut further is high with the RBA clearly reluctant to take the cash rate lower and hoping for further currency weakness to help in the rebalancing challenge,” said Su-Lin Ong, head of Australian economic and fixed-income strategy at Royal Bank of Canada in Sydney. “The RBA appears happy to sit on the sidelines and monitor data and developments with the next board meeting not until February.”

The Australian dollar declined, trading at 90.66 U.S. cents at 4:15 p.m. in Sydney, compared with 90.90 cents prior to the release. The RBA lowered borrowing costs eight times from November 2011 to August 2013.

‘Full Effects’

“The full effects of these decisions are still coming through, and will be for a while yet,” Stevens said today in a statement that mirrored last month’s release. “The pace of borrowing has remained relatively subdued overall to date, though recently there have been signs of increased demand for finance by households.”

The average home price in Australia’s biggest cities rose 8 percent in November from a year earlier, the biggest annual gain since the year ended Oct. 31, 2010, to an all-time high of A$606,003 ($549,400), according to the RP Data-Rismark home value index. Prices in Sydney surged 14 percent in the 11 months to Nov. 30 to a record A$724,628.

Government data today showed retail sales expanded a faster-than-forecast 0.5 percent in October from a month earlier, when the figure was revised higher to 0.9 percent.

‘Near the Bottom’

“Rates are at or near the bottom of the cycle, but rate hikes are probably quite some way off,” said Craig James, a senior economist at a unit of Commonwealth Bank of Australia, in Sydney. “If the economy continues to gather momentum, inflation remains under control and the Aussie dollar remains near U.S. 90 cents or eases further, then the Reserve Bank can happily stay on the interest-rate sidelines.”

Even so, Treasury’s top economic forecaster David Gruen said last month Australia should brace for the weakest income growth in half a century in the coming 10 years. To maintain recent income growth levels would require labor productivity growth to average 3.2 percent a year for a decade -- something never achieved before, Gruen said.

“Further ahead, private demand outside the mining sector is expected to increase at a faster pace, though considerable uncertainty surrounds this outlook,” Stevens said today. “There has been an improvement in indicators of household and business sentiment recently, but it is still unclear how persistent this will be.”

GDP Data

Australia’s economy probably expanded 0.7 percent in the third quarter from three months earlier, economists projected ahead of data due tomorrow. The Treasury predicts unemployment will rise to 6.25 percent next year. The jobless rate was 5.7 percent in October.

Rio Tinto Group, the world’s second-biggest mining company, said last week it plans to suspend alumina production at its Gove refinery due to low prices and the elevated exchange rate. About 1,400 employees and contractors work at Gove, according to Rio’s website.

Rio Tinto today said it will cut capital spending to about $8 billion in 2015, less than half its outlay last year.

The Aussie climbed almost 50 percent in the four years ended Dec. 31 as the nation escaped the 2009 global recession and the China-led commodities-investment boom spurred growth. That squeezed manufacturers and tourism operators in Australia’s southeast, spurring job losses at companies including Ford Motor Co., which said in May it would end production in the country after nine decades.

The Australian dollar has declined 13 percent in 2013. Stevens put currency traders on notice when he said in a speech in Sydney on Nov. 21 that, while the benefits of intervention haven’t “so far” outweighed the costs, it “doesn’t mean we will always eschew” currency sales.

Before it's here, it's on the Bloomberg Terminal.