RBA Reiterates Likely Period of Rate Stability After Holding

Australia’s central bank reiterated that it’s likely to maintain a period of record-low interest rates and renewed a reference to the currency’s strength.

Governor Glenn Stevens and his board kept the overnight cash-rate target at 2.5 percent, saying in a statement that housing prices “have increased significantly” and the Aussie “remains high by historical standards.” The Reserve Bank of Australia’s pause was predicted by all 32 economists surveyed.

After 2.25 percentage points of rate cuts from late 2011 through August, the RBA’s scope to add stimulus to the economy is limited as Sydney house prices surge. Markets and economists predict Stevens will leave rates unchanged at a record-low this year to avoid a growth gap as mining companies plan fewer projects amid slowing Chinese growth, weakening the job market.

“Clearly they have used today’s decision to express the view that the currency is a little bit higher than they would like,” said Tom Kennedy, a Sydney-based economist for JPMorgan Chase & Co. “They were fairly vague on inflation, and we believe rates are going to be on hold for the next few months.”

Australia has only had two calendar years without a rate move -- in 2004 and 1995 -- since the last recession in 1991. The debt to disposable income stood at 147.9 percent as of Sept. 30, according to central bank data.

Rate ‘Stability’

“On present indications, the most prudent course is likely to be a period of stability in interest rates,” Stevens said today, repeating wording from last month’s statement. “The demand for labour has remained weak and, as a result, the rate of unemployment has continued to edge higher.”

The Australian dollar weakened after the announcement, trading at 89.29 U.S. cents at 4:32 p.m. in Sydney, from 89.45 cents before the statement.

The nation’s unemployment rate jumped to 6 percent in January, the highest level since July 2003, and about 50,000 jobs in the auto and parts industry are in jeopardy after Toyota Motor Corp. last month followed General Motors Co. and Ford Motor Co. in announcing plans to quit manufacturing in the country. Alcoa Inc. announced last month the closure of an aluminum smelter and two mills with the loss of 980 jobs.

Australian business investment fell in the fourth quarter by the most since 2009, government data showed last week. Companies projected A$124.9 billion ($111.5 billion) of spending in 2014-15, down from an estimated A$167.1 billion this fiscal year, led by a drop in mining investment.

Slower China

Meanwhile in China, Australia’s biggest trading partner, a gauge of manufacturing fell in February to an eight-month low, while a private index yesterday from HSBC Holdings Plc and Markit Economics indicated a contraction worsened last month.

“Resources sector investment spending is set to decline significantly and, at this stage, signs of improvement in investment intentions in other sectors are only tentative,” Stevens said. “Public spending is scheduled to be subdued.”

The RBA is trying to stimulate housing construction to pick up slack in the labor market from waning mining investment.

A private RP Data-Rismark home value index released this week showed house and apartment prices rose 14.1 percent in Sydney in the year to Feb. 28. Approvals to build new dwellings jumped 6.8 percent in January from a month earlier, data today showed.

“Credit growth remains low overall but is picking up gradually for households,” Stevens said. “Dwelling prices have increased significantly over the past year.”

Savings Ratio

Even with the record low cash rate, Australia’s household savings ratio has held above 10 percent for the past three years as consumers concerned about job security hunker down. That will need to be run down to spur consumption, with the latest data scheduled to be released tomorrow in the fourth quarter-gross domestic product report.

“The bank expects unemployment to rise further before it peaks,” Stevens said. “Over time, growth is expected to strengthen, helped by continued low interest rates and the lower exchange rate. Inflation is expected to be consistent with the 2–3 percent target over the next two years.”

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