RBA Saw More Signs Low Interest Rates Helping Spur EconomyMichael Heath
Australia’s central bank said it saw more signs record-low interest rates were boosting growth, and reiterated a period of steady borrowing costs was likely.
“Timely indicators were consistent with some improvement in economic conditions over recent months,” the Reserve Bank of Australia said in minutes released today of its March 4 meeting. “The decline in the exchange rate seen to date would assist in achieving balanced growth in the economy, though members noted that the exchange rate remained high by historical standards.”
Markets and economists predict the central bank will leave rates unchanged this year to avoid a growth gap emerging as mining companies plan fewer projects. Governor Glenn Stevens has kept the benchmark cash rate at 2.5 percent since August.
“The board’s confidence is increasing that monetary policy easings are working to support activity with signs of improved economic conditions and that inflation is expected to remain consistent with the target,” said Paul Brennan, chief economist in Australia for Citigroup Inc. “The commentary is consistent with no further lowering of rates and we continue to see the period of rate stability extending until early next year.”
The Australian dollar traded at 90.80 U.S. cents at 3:40 p.m. in Sydney, from 90.93 cents before the minutes were released.
Low borrowing costs are driving up home prices, underscoring the RBA’s reluctance to add to its 2.25 percentage points of rate cuts since late 2011.
“A strong increase in approvals for residential buildings over recent months -- both for high-density and detached dwellings -- pointed to a substantial increase in dwelling investment in subsequent quarters,” the RBA said. “Members noted that construction firms were optimistic about the outlook and had reported a pick-up in enquiries from prospective new home buyers.”
The average home price in Australia’s biggest cities rose 9.5 percent in the year to Feb. 28, according to the RP Data-Rismark home value index. Prices in Sydney surged 14.1 percent from a year ago. Approvals to build new dwellings in Australia jumped 6.8 percent in January from a month earlier, according to government figures.
House-price inflation had “declined somewhat” from the “fast pace” seen in 2013, the RBA said.
“Members noted that the recent momentum in households’ risk appetite and borrowing behavior warranted close observation, but agreed that present conditions in the household sector did not pose a near-term risk to the financial system,” the minutes showed, citing a briefing to the board on the RBA’s half-yearly assessment of the financial system. “Members discussed the experience in other countries where macro-prudential tools had been utilized to slow demand for established housing and their possible application in Australia.”
Documents released to Bloomberg News this month under a Freedom of Information Act request showed the RBA’s preferred macro-prudential tool was to build in a buffer for higher interest rates at the time of a loan approval.
“There were further signs that low interest rates were providing support to activity,” policy makers said. “The most prudent course was likely to be a period of stability in interest rates.”
The RBA’s policy meeting this month came before a March 5 report that showed the economy expanded faster than economists’ forecast in the final three months of 2013 on rising household spending and lower savings. It also preceded data showing Australian employers boosted full-time payrolls in February by 80,500, the most in more than 22 years, and overall employment climbed 47,300.
Bill Evans, Westpac Banking Corp.’s chief economist and the first to call the RBA’s latest easing cycle, yesterday dropped his prediction of further rate cuts as employment strengthens.
The stronger data helped boost the currency as traders wagered the central bank’s easing cycle is over. Australia’s dollar dropped 14 percent last year, the steepest decline after the yen among 10 developed nation currencies tracked by Bloomberg Correlation Weighted Indexes.
The RBA said contained domestic costs helped by slower wage growth would “be expected to keep inflation consistent with the target even with lower levels of the exchange rate.”
The central bank said the “limited data available” on China suggested that “growth may have moderated a little in early 2014.” China is Australia’s biggest trading partner. The board was also briefed on longer-run trends in China.
These “suggested that, while the working age population was close to peaking, urbanization was expected to continue in China for some time,” the RBA said. “Combined with likely increases in the size and quality of housing, this could underpin high levels of new urban residential construction over coming years.”