RBA Holds Key Rate at Record-Low 2.5% After Inflation Slowed

Australia’s central bank left its benchmark interest rate unchanged at a record low as slowing inflation and anticipated cuts to government spending give policy makers room to support economic growth.

Governor Glenn Stevens and his board kept the overnight cash-rate target at 2.5 percent, as predicted by all 33 economists surveyed by Bloomberg News, and reiterated borrowing costs are likely to remain steady for a period. The Reserve Bank of Australia noted “improvement in indicators for the labour market,” in one of few changes from last month’s statement.

A pick up in housing and resilient employment indicate the central bank’s 2.25 percentage points of rate cuts from late 2011 through August are helping avoid a growth gap as mining investment wanes. Consumer prices rose less than forecast last quarter as the currency’s strength suppressed import prices, allowing the RBA to keep borrowing costs low amid likely spending cuts in Treasurer Joe Hockey’s first budget due May 13.

“A long period of low, stable interest rates would act as a nice foil to the uncertainty generated by the federal budget,” said Craig James, a senior economist at a unit of Commonwealth Bank of Australia. “The housing construction boom has potential to be an extended boom given that there is a longer period between the concept and completion of an apartment block and the same life cycle of a new free-standing house. The risk is that home prices may grow at unsustainable annual rates.”

Aussie Dollar

The Australian dollar rose as much as 0.5 percent after the decision, before trading at 92.76 U.S. cents at 3:26 p.m. in Sydney. It has gained about 4 percent this year, the biggest advance after the kiwi among group of 10 currencies. That helped curb inflation, which slowed to 0.5 percent in the first quarter from 0.9 percent three months earlier under the trimmed mean gauge.

Record-low rates have boosted the property market: the median house and apartment price in Australia’s eight biggest cities rose 11.5 percent in April from a year earlier, and Sydney led gains with a 16.7 percent increase, according to RP Data-Rismark home value index released May 1.

“Dwelling prices have increased significantly over the past year,” Stevens said. “Credit growth has picked up a little.”

Unemployment Drop

Unemployment unexpectedly dropped in March to 5.8 percent from a more than 10-year high of 6.1 percent a month earlier. Employers probably hired a further 9,500 people in April and the jobless rate edged up to 5.9 percent, economists predicted ahead of data on May 8.

“It will probably be some time yet before unemployment declines consistently,” Stevens said today. The RBA will release its updated quarterly economic forecasts on May 9.

China’s manufacturing contracted for a fourth month in April, according to a private survey that missed estimates, adding to concerns the slowdown in Australia’s biggest trading partner is deepening.

“China’s growth appears to have slowed a little in early 2014 but remains generally in line with policy makers’ objectives,” Stevens said. On global growth, he said “there are reasonable prospects of a better outcome this year, helped by firmer conditions in the advanced countries.”

A government report today showed Australia’s exports to China, its biggest trading partner, climbed to a record A$9.5 billion ($8.8 billion) in March, even as the trade surplus narrowed to A$731 million for the month.

“Commodity prices in historical terms remain high, though some of those important to Australia have softened further of late,” Stevens said today.

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