Australia leaves interest rate at record low of 2.5 per cent

House prices in country’s biggest cities rose 8% in year to November

Prices in Sydney surged 14 per cent in the 11 months to November 30th to a record A$724,628 (¤487,000). Photograph: Getty Images

Prices in Sydney surged 14 per cent in the 11 months to November 30th to a record A$724,628 (¤487,000). Photograph: Getty Images

Tue, Dec 3, 2013, 08:38

Australia’s central bank left its benchmark interest rate unchanged at a record low and said the currency is “still uncomfortably high,” even after a 4.6 per cent decline since its previous meeting.

Governor Glenn Stevens and his board kept the overnight cash-rate target at 2.5 per cent, the Reserve Bank of Australia said in a statement today in Sydney, as predicted by all 30 economists surveyed.

Maintaining the same language as a month earlier, he said a lower Aussie “is likely to be needed to achieve balanced growth in the economy.”

Markets and economists predict the central bank will leave rates unchanged next year to avoid a growth gap emerging as mining companies plan fewer projects.

Low borrowing costs are driving up home prices, suggesting the RBA may be reluctant to add to its 2.25 percentage points of rate cuts since late 2011.

“The hurdle to cut further is high with the RBA clearly reluctant to take the cash rate lower and hoping for further currency weakness to help in the rebalancing challenge,” said Su-Lin Ong, head of Australian economic and fixed-income strategy at Royal Bank of Canada in Sydney.

“The RBA appears happy to sit on the sidelines and monitor data and developments with the next board meeting not until February.”

The Australian dollar declined, trading at 90.66 US cents at 4.15pm in Sydney, compared with 90.90 cents prior to the release.

The RBA lowered borrowing costs eight times from November 2011 to August 2013.

‘Full effects’

“The full effects of these decisions are still coming through, and will be for a while yet,” Mr Stevens said today in a statement that mirrored last month’s release.

“The pace of borrowing has remained relatively subdued overall to date, though recently there have been signs of increased demand for finance by households.”

The average home price in Australia’s biggest cities rose 8 per cent in November from a year earlier, the biggest annual gain since the year ended October 31st, 2010, to an all-time high of A$606,003 (€407,000), according to the RP Data-Rismark home value index.

Prices in Sydney surged 14 per cent in the 11 months to November 30th to a record A$724,628.

Government data today showed retail sales expanded a faster-than-forecast 0.5 per cent in October from a month earlier, when the figure was revised higher to 0.9 per cent.

‘Near the bottom’

“Rates are at or near the bottom of the cycle, but rate hikes are probably quite some way off,” said Craig James, a senior economist at a unit of Commonwealth Bank of Australia, in Sydney.

“If the economy continues to gather momentum, inflation remains under control and the Aussie dollar remains near US 90 cents or eases further, then the Reserve Bank can happily stay on the interest-rate sidelines.”

Even so, Treasury’s top economic forecaster David Gruen said last month Australia should brace for the weakest income growth in half a century in the coming 10 years.

Bloomberg

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