The move, which comes on the eve of the national budget, is the most prudent course, says RBA Governor, reports Team IFM
Sydney, May 8: In a widely-anticipated policy announcement on Tuesday that has propped the country’s construction sector and stoked employment since last September, Australia’s central bank said it was keeping its overnight cash rates unchanged at 2.5 percent, noting that there were “improvements” on the job front.
This is for the ninth straight month that rates have been kept at record low levels.
“In the Board’s judgement, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target,” RBA Governor Glen Stevens said in a statement.
“On present indications, the most prudent course is likely to be a period of stability in interest rates,” he added in the statement that read almost like a copy of what RBA had said in April. Among the few additions to his latest statement, Stevens referred to improvements in the labour market.
The RBA announcement comes on the eve of Treasurer Joe Hockey’s maiden budget, to be presented on May 13. It is believed Hockey could announce austerity measures that would squeeze government spending.
The announcement was largely anticipated by analysts; for instance, all the 33 economists who Bloomberg News polled said they foresaw no policy change as the RBA sought to keep borrowing rates low to fan spending in areas like new houses.
According to data released on May 2 by Australia’s Housing Industry Association, new home sales for March rose 0.2 percent month-on-month. However, this growth was considerably lower than that notched in February, which saw sales go up 4.6 percent.
On the other hand, the March sales was a huge jump of 23.4 percent year-on-year, while the first quarter sales went up 5.8 percent as compared to the last quarter of 2013, the industry data showed.
“A long period of low, stable interest rates would act as a nice foil to the uncertainty generated by the federal budget,” Bloomberg quoted Commonwealth Bank of Australia economist Craig James as saying.
“The housing construction boom has potential to be an extended boom given that there is a longer period between the concept and completion of an apartment block and the same life cycle of a new free-standing house. The risk is that home prices may grow at unsustainable annual rates.”
In a statement on monetary policy last November, RBA had indicated higher property prices are needed to spur the building industry.
“Overall, the outlook for below-trend growth over the coming year reflects the substantial fall in mining investment, planned fiscal restraint and the still high level of the Australian dollar,” the November statement had said.
“On the other hand, low interest rates are stimulating dwelling construction as well as prices and turnover in the established housing market,” RBA had said.
In his statement on Tuesday, Governor Stevens indicated RBA felt investors’ mood was less than upbeat though current financial conditions were “very accommodative” and business conditions had improved.
“Some indicators of business conditions and confidence have improved from a year ago and exports are rising,” he said. “But at the same time, signs of improvement in investment intentions in other sectors are only tentative, as firms wait for more evidence of improved conditions before committing to expansion plans. Public spending is scheduled to be subdued.”
Stevens dwelt at length on the employment scenario, saying demand for labour has been weak over the past year, which was pushing up unemployment.
“More recently, there has been some improvement in indicators for the labour market, but it will probably be some time yet before unemployment declines consistently,” he said. “Growth in wages has declined noticeably.”
Coming to home turf, Stevens said monetary policy was accommodative. “Interest rates are very low and savers continue to look for higher returns in response to low rates on safe instruments. Credit growth has picked up a little, while dwelling prices have increased significantly over the past year.”
Looking ahead, he said, continued accommodative monetary policy should provide support to demand, and help growth to strengthen over time.
“In the Board’s judgement, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target,” the RBA Governor said. “On present indications, the most prudent course is likely to be a period of stability in interest rates.”
Analysts say that by keeping the overnight interest rate untouched, RBA is trying to stoke construction in the housing sector so as to absorb excess labour created by falling investment in mining – and thereby create employment and boost consumption.
Consequently, thanks to the near-record low interest rates and improved economic prospects for both buyers and sellers, the Australian housing sector has never had it so good.
Lenders have been quick to cash in on the opportunity provided by the RBA’s unbiased approach to the lending rate, and have begun encouraging home loan customers to “shop around” for the best deal to suit their needs.
“The mortgage market had never been more competitive for customers who are now able to find a home loan that suits their needs with a great rate,” said Gavin Slater, Group Executive, Personal Banking cell at the National Australia Bank (NAB), in a statement.
The way ahead was indicated last November with RBA making it clear that it believed the low interest rates would stimulate housing construction, prices as well as turnover in the established housing market.
RBA also speculated that it was “likely” that these trends would be associated with stronger growth in household consumption over time.
“Subsequently, this pick-up in demand, and the improvement in consumer and business sentiment, is expected to flow through to stronger non-mining business investment, which would contribute to higher GDP growth over 2015,” it had said.
That Tuesday’s announcement by RBA Governor Stevens was a continuation of this thinking was not lost on analysts.
“The RBA is broadly happy with how the economy is improving and further gains are expected over time,” Moody’s Analytics associate economist Katrina Ell told the Sydney Morning Herald newspaper.
“Rate hikes won’t be considered until the unemployment rate heads lower,” the paper quoted Ell as saying.