RBA Saw More Signs Low Rate Boosting Economy Amid CPI Puzzle

Australia’s central bank said a period of steady interest rates is likely as record-low borrowing costs and a weaker currency aid growth and it monitors prices after a surprising acceleration in inflation.

“There were further signs that the expansionary setting of monetary policy was having the expected effects,” the Reserve Bank of Australia said in minutes released today of its Feb. 4 meeting, where it kept the benchmark rate unchanged at 2.5 percent. “The board noted that it was likely the inflation reading contained some noise as well as some signal about inflationary pressures, but also presented something of a puzzle in interpreting the mix of activity and price data.”

Markets and economists predict the central bank will likely leave rates unchanged this year to avoid a growth gap emerging as mining companies plan fewer projects. Low borrowing costs are driving up home prices, indicating the RBA may be reluctant to add to 2.25 percentage points of rate cuts since late 2011 even as unemployment rose to the highest level in more than 10 years.

“Members recognized that conditions in the labor market tended to lag economic growth, and that the labor market had remained weak following the period of below-trend growth in activity,” the minutes showed. “If the economy evolved broadly as expected, the most prudent course would likely be a period of stability in interest rates.”

Currency Gains

The Australian dollar rose, trading at 90.73 U.S. cents at 11:52 a.m. from 90.38 cents prior to the release. Traders are pricing in 16 basis points of rate increases over the next 12 months, a Credit Suisse Group AG index based on swaps data showed.

Australia’s property market has jumped in response to the record-low benchmark cash rate. The average home price in the biggest cities rose 9.8 percent in the year to Jan. 31, according to the RP Data-Rismark home value index. Prices in Sydney surged 13.4 percent from a year ago.

“While weak conditions in the labor market had weighed on consumption growth, the increase in housing and equity prices over the past year raised the possibility that consumption growth could outpace that of income in the period ahead,” the central bank said. “The bank’s liaison suggested that sales around the Christmas and New Year period were reasonably good.”

Forecast Upgrade

The RBA raised its growth and inflation forecasts this month, reflecting the weaker currency. The Aussie dropped 14 percent last year, the steepest decline after the yen among 10 developed nation currencies tracked by Bloomberg Correlation Weighted Indexes. It has climbed almost 3 percent in the past month as traders bet the RBA’s easing cycle has ended.

“If sustained, a lower exchange rate would be expansionary for economic activity and assist in achieving balanced growth in the economy,” the RBA said in the minutes.

The policy meeting was held before data showed the jobless rate climbed to 6 percent in January. The rise in unemployment had been checked in recent years by a lower participation rate.

“Members were informed that the ageing of the population accounted for around half of the decline in the participation rate over the past few years,” the minutes showed.

Australia’s economy has been boosted over the past decade by high prices for resource shipments to China. Iron ore sales to the world’s second-largest economy from Port Hedland climbed 27 percent in January from a year earlier.

“Iron ore prices were expected to decline gradually over time as global capacity expanded further,” the RBA said in the minutes.

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