Australia Keeps Rates on Hold at Record-Low 0.75%

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Australia’s central bank kept interest rates unchanged as three cuts since June inject new life into the property market and raise the prospect of improved household spending and home-building.

Reserve Bank Governor Philip Lowe kept the cash rate at 0.75% Tuesday, in line with expectations of economists and money markets. He’s conserving his remaining conventional ammunition -- estimated at two more rate cuts -- to monitor the impact of earlier easing and recent government tax rebates.

The lower cash rate has “boosted asset prices, which in time should lead to increased spending, including on residential construction,” Lowe said in a statement. “Lower mortgage rates are also boosting aggregate household disposable income which, in time, will boost household spending.”

Read More: Aussie Gains After RBA Says Some Risks Lessened

The RBA’s final meeting of the year sees policy makers no closer to reviving wage growth and inflation, trends that have bedeviled central banks worldwide. Australia’s economy has decelerated in the past 12 months as households limit spending, and sentiment remains weak despite the increased cash flow from interest rate and tax cuts.

However, the economy has kept advancing on strong population growth and state government infrastructure spending to keep pace with swelling cities. Hiring has remained resilient in the face of slowing growth, though the labor market isn’t tight enough -- with unemployment at 5.3% -- to spur the kind of wage gains the RBA wants.

What Bloomberg’s Economists Say

“The key message from the RBA board’s December Statement is that it’s going to take time. And with the ‘long and variable lags in the transmission of monetary policy,’ the Board is in no rush to dole out the remaining 50bp of conventional policy ammunition unless needed. With the currency remaining supportive, and the turnaround in housing markets alleviating one downside for household consumption, time is on the RBA’s side. Until February at least.”

James McIntyre, economist

The Australian dollar edged up to 68.42 U.S. cents at 3:45 p.m. in Sydney, from about 68.20 cents before the decision. Traders are pricing in a more-than-50% chance of a cut at the RBA’s next meeting in February, with prominent economists such as JPMorgan Chase & Co.’s Sally Auld and Westpac Banking Corp.’s Bill Evans also predicting easing then.

The currency, which has declined about 16% since early last year, is helping policy makers by improving export competitiveness.

“The lower cash rate has put downward pressure on the exchange rate, which is supporting activity across a range of industries,” Lowe said. “Given these effects of lower interest rates and the long and variable lags in the transmission of monetary policy, the board decided to hold the cash rate steady.”

The clearest impact of easing has been in east coast house prices. Annualized gains over the past three months in the Sydney and Melbourne markets are tracking in the mid-20% range.

Analysts expect data Wednesday will show the economy expanded an annual 1.7% in the third quarter, well short of the estimated trend pace of 2.75%.

Global Outlook

On the international front, the RBA said risks remain tilted to the downside but have “lessened recently.” The U.S. and China are trying to work out an initial agreement on trade, offering hope of an eventual settlement to their trade dispute.

Lowe noted that the domestic consumption outlook is a key unknown.

“Other sources of uncertainty include the effects of the drought and the evolution of the housing construction cycle,” he said.

Lowe faces difficult decisions ahead. He has little rate ammunition remaining and the government is reluctant to boost fiscal spending as it tries to return the budget to surplus. The governor has laid out what an eventual Australian version of quantitative easing might look like, though he doesn’t expect the central bank will need to choose that path.

His bet is that the interest rate and tax cuts, combined with rising house prices, will encourage consumers to loosen their purse strings. Comprising some 55% of the economy, consumption is key to sustained growth. A lift in mining investment also could drive faster expansion.

The board agreed “it was reasonable to expect that an extended period of low interest rates will be required in Australia,” Lowe said. “The board is prepared to ease monetary policy further if needed.”

--With assistance from Tomoko Sato and Garfield Reynolds.

To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Malcolm Scott, Michael S. Arnold

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