Australia Keeps Rates on Hold Despite Pressure from Property Slump

(Bloomberg) -- Australia’s central bank stared down calls to shift to a neutral bias amid a slumping property market, leaving its interest rate at a record low while acknowledging that downside risks have increased at home and abroad.

Governor Philip Lowe struck a more cautious tone at the Reserve Bank’s first board meeting of the year and slightly lowered key forecasts, saying “the main domestic uncertainty remains around the outlook for household spending and the effect of falling housing prices in some cities.”

The central bank now predicts the economy will grow around 3 percent this year and “a little less” in 2020, a bit slower than predicted in November. It also trimmed this year’s core inflation outlook to 2 percent from 2.25 percent, ahead of updated forecasts to be released Friday.

“The bank has made some concessions to recent developments, but at present does not see these as threatening the economy’s ability to sustain above-trend growth,” said Sally Auld, senior strategist for interest rates at JPMorgan Chase & Co. in Sydney. “Further growth downgrades from here will be highly significant for the policy outlook.”

Australia Keeps Rates on Hold Despite Pressure from Property Slump

Lowe has resisted resuming rate cuts after a 2-1/2 year hiatus, maintaining that rising investment and strong hiring show the economy’s underlying strength. Yet data since early December has showed a sharp slowdown in household spending, suggesting a 12 percent drop in Sydney house prices and plunging building approvals are starting to take their toll on consumers.

“The housing markets in Sydney and Melbourne are going through a period of adjustment, after an earlier large run-up in prices,” the RBA chief said in his statement. “Conditions have weakened further in both markets and rent inflation remains low.”

Markets were relieved that Lowe’s statement hit many of the same notes as the last one in December. The Australian dollar rose after the decision, buying 72.63 U.S. cents at 4:22 p.m in Sydney, compared with 72.09 before the report.

Trade War

At a global level, weaker growth in China and Europe is cooling the world’s economy as the threat of a U.S.-Sino trade war further aggravates the outlook. Lowe said the tensions were affecting “global trade and some investment decisions.”

The Federal Reserve meanwhile has shelved plans for further rate increases, which is unlikely to be welcomed by an RBA that’s been relying on Fed hikes to push down the currency. On top of that, higher funding costs have prompted banks to jack up their interest rates, despite the RBA staying on the sidelines.

But iron ore and coal prices remain strong, with the former trading at the highest in over a year, the budget is headed back to surplus for the first time in a decade and unemployment has fallen to 5 percent.

“The vacancy rate is high and there are reports of skills shortages in some areas,” Lowe said. “The stronger labor market has led to some pick-up in wages growth, which is a welcome development.”

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