RBA Holds Rates at Record Low as Budget Weighs on Confidence

The Reserve Bank of Australia kept its benchmark cash rate at a record low as fiscal consolidation adds to a mining investment slowdown as a brake on growth.

The key rate was held at 2.5 percent for a 10th month, Governor Glenn Stevens and his board announced in Sydney today, repeating an expectation for “a period of stability” in rates. The decision was predicted by all 32 economists surveyed by Bloomberg and markets had priced in almost no chance of a move.

Stevens noted “signs of improvement in investment intentions” in non-resources industries, and dropped a reference to weakness in the labor market. On the currency, he said it “remains high by historical standards, particularly given the further decline in commodity prices.”

Prices of iron ore, Australia’s biggest export, capped a sixth monthly drop in May in the longest losing run on record as rising supplies from Australia and Brazil spurred a global glut. Consumer confidence has been dented by spending cuts announced in Treasurer Joe Hockey’s budget last month, which the central bank has flagged as a headwind for growth, along with a drop in resource investment.

“The RBA’s earlier rate cuts are bearing fruit,” said Katrina Ell, an economist at Moody’s Analytics in Sydney. “The labor market is healing, and export volumes are strong thanks to earlier investment. The RBA is mindful that the economic recovery is fragile, not least because of fiscal consolidation and lower mining investment, so rates will likely remain accommodative at 2.5 percent through 2014.”

Housing, Employment

With a pickup in housing and resilient employment balancing the outlook, traders expect the RBA will remain sidelined this year, weighing the effect of its 2.25 percentage points of cuts from late 2011 to August 2013.

The Australian dollar was little changed after the decision and has gained about 3.8 percent this year, the biggest advance among group of 10 currencies. Traders are pricing in 5 basis points of increase to the benchmark cash rate over the next 12 months, according to an index of swaps from Credit Suisse Group AG in Sydney today.

Australia’s treasurer last month announced cuts to spending on welfare and the public service and a new tax on the highest paid. Consumer confidence fell to its lowest level since August 2011, prior to the central bank’s most recent easing cycle, after the budget’s May 13 release.

Subdued Spending

“Public spending is scheduled to be subdued,” Stevens said.

The labor market has held up, with the jobless rate remaining at a better-than-expected 5.8 percent in April. Lending too is responding to low borrowing costs, with private-sector credit expanding 4.6 percent in April from a year earlier, the fastest pace since March 2009, central bank data showed.

Home prices slipped 1.9 percent in May from a month earlier, according to RPData-Rismark’s Hedonic Home Value Index report released in Sydney yesterday, the first drop in a year. Melbourne led declines with a 3.6 percent drop.

“Dwelling prices have increased significantly over the past year, though there have been some signs of a moderation in the pace of increase recently,” Stevens said in today’s statement. “Monetary policy remains accommodative.”

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