RBA Holds Policy Nerve, Waits to See Which Way Consumers Go

(Bloomberg) -- Australia’s central bank held its nerve in the face of a credit squeeze and tumbling property prices, keeping interest rates unchanged as it waits to see how consumers respond.

Governor Philip Lowe kept the cash rate at 1.5 percent Tuesday -- as expected by markets and economists -- saying “the main domestic uncertainty continues to be the strength of household consumption in the context of weak growth in household income and falling housing prices in some cities.”

The Reserve Bank is under mounting pressure to end a 2-1/2 year pause in rate cuts amid signs consumers are hunkering down amid a property slump. Sydney house prices have fallen 13 percent from their peak and bank lending is the weakest since the 1980s. But Lowe is taking heart from strong hiring and low unemployment, and holding out for Wednesday’s fourth-quarter GDP report to gauge the state of consumption.

The Australian dollar was little changed after the decision, while traders are pricing in an 86 percent chance of a rate cut by year’s end.

RBA Holds Policy Nerve, Waits to See Which Way Consumers Go

Unemployment in Australia has fallen to 5 percent as firms continue to hire and invest. Indeed, the economy shows an unusual divide: solid jobs, investment and growth on one hand; with weak lending, a slumping housing market and faltering consumption on the other.

“Demand for credit by investors in the housing market has slowed noticeably as the dynamics of the housing market have changed,” Lowe said. “Growth in credit extended to owner-occupiers has eased further.”

The RBA has run easy policy to try to tighten the labor market sufficiently to spur wage growth and inflation. Core consumer-price gains have failed to reach the lower end of the central bank’s 2-3 percent target for the past three years.

“Underlying inflation is expected to pick up over the next couple of years, with the pickup likely to be gradual and to take a little longer than earlier expected,” the governor said.

What Our Economists Say...

“The RBA is not ready to give up on its outlook for growth above potential this year, and for good reason. Amid the recent deterioration in several business indicators have been significant positive signals from the U.S. and China, which could turn sentiment around relatively quickly.”

-- Tamara Mast Henderson, Bloomberg Economics

For more, see our Australia Insight

The global backdrop looks a bit more optimistic than last month, with the U.S. and China appearing to be near a trade deal. But the latter’s growth is slowing, which only adds to the clouds looming over Australia -- the developed world’s most China-reliant economy.

“The outlook for the global economy remains reasonable, although downside risks have increased,” Lowe said. “In China, the authorities have taken further steps to ease financing conditions, partly in response to slower growth in the economy. ”

The Aussie dollar has provided some stimulus to exporters by falling 9 percent over the past year. The governor reiterated that the currency has “remained within the narrow range of recent times,” and while the terms of trade are up over the past couple of years, they’re expected to decline over time.

The economy is forecast to grow 0.3 percent in the final three months of 2018 and 2.6 percent from a year earlier -- a reasonable result but not sufficient to further curb spare capacity in the labor market. Prior to Wednesday’s report, Lowe is due to speak in Sydney on the housing market.

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