Australia’s Central Bank Keeps Rates on Hold at Record Low 0.75%

(Bloomberg) --

Australia kept interest rates unchanged Tuesday as the labor and property markets’ strength gives the central bank room to wait and see how badly the economy will be hit by a slump in China’s growth.

Governor Philip Lowe kept the cash rate at 0.75% at the Reserve Bank’s first meeting of 2020, as predicted by most economists and traders. The jobless rate falling in the final two months of 2019 kept the RBA sidelined, despite the impending hit from wildfires and now the coronavirus.

Australia’s Central Bank Keeps Rates on Hold at Record Low 0.75%

The virus “is having a significant effect on the Chinese economy at present. It is too early to determine how long-lasting the impact will be,” Lowe said in a statement announcing the decision. “The board will continue to monitor developments carefully, including in the labor market. It remains prepared to ease monetary policy further if needed.”

The Australian dollar rose, trading at 67.22 U.S. cents at 3:41 p.m. in Sydney, from 66.86 before the decision.

Australia’s economic fortunes are heavily dependent on the world’s number 2 economy: China buys one-third of Australian goods and services. Halting flights to limit the spread of the virus will strike at the heart of the education and tourism sectors, some of the nation’s most valuable exports. A slowing Chinese economy also has less need for iron ore, and the price is tumbling accordingly.

“In the short term, the bushfires and the coronavirus outbreak will temporarily weigh on domestic growth,” Lowe said, forecasting the economy to expand around 2.75% this year and 3% in 2021. That’s little changed from the bank’s November forecasts.

The RBA’s capacity to cushion these shocks with monetary policy is questionable and doing so could cause more harm than good. The central bank lowered rates three times between June and October as it sought to buttress the economy. While the property market revived, consumer confidence sagged as households were spooked by the signal the cuts sent about the growth outlook.

The governor might have been considering this when he outlined the board’s current thinking on its policy stance. “With interest rates having already been reduced to a very low level and recognizing the long and variable lags in the transmission of monetary policy, the board decided to hold the cash rate steady,” he said.

Markets have a chance to gain further insight into the bank’s thinking when Lowe speaks at the National Press Club Wednesday. That’s followed Friday by three hours of parliamentary testimony that will take place concurrently with the release of the RBA’s updated quarterly forecasts.

What Bloomberg’s Economists Say

“The RBA Board faced a difficult challenge at their first meeting for 2020. The two major risks to Australia’s economic outlook -- the wildfire crisis and the coronavirus outbreak -- are still evolving rapidly.

Economic data supported the case for the RBA to pause and wait for further details on how rate cuts last year were working their way through the economy, and how badly current shocks have derailed the economy’s ‘gentle turning point’.”

James McIntyre, economist

The Australian economy’s traditional shock absorber -- the exchange rate -- has also been responding to the rising threats to the economy, and is down almost 4% in the past month.

“The lower cash rate has put downward pressure on the exchange rate, which is supporting activity across a range of industries,” Lowe said. “Lower interest rates have assisted with the process of household balance sheet adjustment.”

The central bank forecast unemployment to remain around the current level -- 5.1% -- “for some time,” suggesting the November forecasts have been lowered. CPI is still expected to be around 2% in the near-term with core inflation rising gradually to 2% over the next couple of years. The RBA targets inflation of 2%-3%.

Lowe’s growth forecasts suggests he expects fire reconstruction will boost the economy in future quarters after a near-term hit, aided by the government’s loosened purse strings.

He is more optimistic on the outlook for households, which have struggled under heavy debt and weak wage growth.

“Consumption growth is expected to pick up gradually,” the governor said. “The overall outlook is also being supported by the low level of interest rates, recent tax refunds, ongoing spending on infrastructure, a brighter outlook for the resources sector and, later this year, an expected recovery in residential construction.”

©2020 Bloomberg L.P.

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