RBA Holds Rates at Record Low as High Aussie Impedes Transition

The Reserve Bank of Australia kept its benchmark cash rate at a record low as an elevated currency combines with government cutbacks and a slowdown in mining investment to constrain growth.

The key rate was held at 2.5 percent for an 11th month, Governor Glenn Stevens and his board announced in Sydney today. The decision was predicted by all 29 economists surveyed by Bloomberg and markets had priced in almost no chance of a move.

In a largely unchanged statement, Stevens said the nation’s elevated currency “is offering less assistance than it might in achieving balanced growth in the economy.” The central bank has flagged government spending cuts and a drop in resource investment as constraints on growth. With a pickup in housing and resilient employment balancing the outlook, traders expect the RBA will remain sidelined this year.

“It’s a pretty balanced statement,” said Su-Lin Ong, head of Australian economic and fixed-income strategy at Royal Bank of Canada in Sydney. “Rates are likely to remain low for an extended period -- that’s the clear message from the RBA.”

Stevens is due to deliver a speech in Hobart on July 3.

The Australian dollar has gained more than 7 percent since the RBA moved to a neutral bias in February this year. It traded at 94.50 U.S. cents at 3:12 p.m., compared with 94.17 cents before the release.

Traders are pricing in 4 basis points of declines to the benchmark rate over the next 12 months, according to an index of swaps from Credit Suisse Group AG in Sydney today.

Budget Cuts

Australia’s treasurer in May announced cuts to spending on welfare and the public service and a new tax on the highest paid that began today. 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.

The labor market has held up, with the jobless rate remaining at 5.8 percent in May. Lending too is responding to low borrowing costs, with private-sector credit expanding 4.7 percent in May from a year earlier, the fastest pace since March 2009, central bank data showed.

“There has been some improvement in indicators for the labor market in recent months, but it will probably be some time yet before unemployment declines consistently,” Stevens said today. “Overall, the bank still expects growth to be a little below trend over the year ahead.”

Home prices rebounded 1.4 percent in June after slipping 1.9 percent in May, according to RP Data-Rismark’s Hedonic Home Value Index report released in Sydney today.

RBA board member John Edwards said in a paper released last week that Australia can weather the slump in mining investment, and Japan could return as the nation’s biggest trading partner, spurred by increasing liquefied natural gas exports.

Replacing 2 percent to 3 percent of gross domestic product with non-mining sources of growth over five to six years will be “onerous but not difficult,” Edwards wrote in the paper for the Lowy Institute titled “Beyond the Boom.” A weaker currency would also help, he said.

Before it's here, it's on the Bloomberg Terminal.