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Oz central bank keeps July cash rate steady at record low of 2.5%

RBA wants the effects of low interest rate to keep flowing through the economy, which is plagued by tardy growth in the mining sector, reports Team IFM Sydney, July 8: The Reserve Bank of Australia (RBA) has kept its benchmark cash rate on hold in July to help support a soft economy as an elevated currency combines with government cutbacks and a slowdown in mining...

RBA wants the effects of low interest rate to keep flowing through the economy, which is plagued by tardy growth in the mining sector, reports Team IFM

Sydney, July 8: The Reserve Bank of Australia (RBA) has kept its benchmark cash rate on hold in July to help support a soft economy as an elevated currency combines with government cutbacks and a slowdown in mining investment to constrain growth.

Last month too, the Australian central bank had kept the rate untouched, saying tardy mining investment had resulted in a need for fiscal consolidation. A similar move this month reaffirmed its view that the most prudent course is likely to be a period of stability.

In fact, the RBA has been waiting for the effects of low interest rates to keep flowing through the economy, although it had realised in June that it was difficult to judge the extent to which the holding of rate would offset the transition away from mining investment.

In a widely expected move, the central bank left the rate at a record low of 2.5 per cent at its July meeting. It has been at that level since the most recent cut in August last year.

The key rate was held at 2.5 percent for the 11th successive month, RBA Governor Glenn Stevens and his board announced in Sydney on July 1. The decision was predicted by all 29 economists surveyed by Bloomberg and markets had priced in almost no chance of a move.

The Australian central bank said it still expects growth to be a little below trend over the year ahead, despite “somewhat firmer growth” around the turn of the year largely due to strong increases in resource exports.

HOUSING EXPANDS

The bank noted a strong expansion in housing construction currently underway, as well as moderate growth in consumer demand. Overall, interest rates remain at “very low” levels and housing prices have increased “significantly” over the past year.

Home prices rebounded 1.4 percent in June after slipping 1.9 percent in May, according to RP Data-Rismark’s Hedonic Home Value Index report quoted by Bloomberg. The report was released in Sydney on July 1.

The RBA also noted some improvement in labour market indicators but said it would probably be some time yet before the rate of unemployment fell consistently. Overall, the labour market has held up, with the jobless rate remaining at 5.8 percent in May. Lending too is responding to low borrowing costs, with private-sector credit expanding 4.7 percent in May from a year earlier, the fastest pace since March 2009, according to central bank data.

The bank said wage growth had declined noticeably, adding that inflation should remain consistent with the 2-to-3 percent target if other domestic costs also remained contained.

“Commodity prices in historical terms remain high, but some of those important to Australia have declined,” the RBA governor observed in the Tuesday press release.

ELEVATED DOLLAR

In a statement, largely unchanged from the one that had been released in June, Governor Stevens said the nation’s elevated currency “is offering less assistance than it might in achieving balanced growth in the economy.” The central bank has flagged government spending cuts and a drop in resource investment as constraints on growth. With a pickup in housing and resilient employment balancing the outlook, traders expect that the RBA will remain sidelined this year.

“It’s a pretty balanced statement,” Su-Lin Ong, head of Australian economic and fixed-income strategy at Royal Bank of Canada in Sydney, told Bloomberg. “Rates are likely to remain low for an extended period – that’s the clear message from the RBA.”

The Australian dollar has gained more than 7 percent since the RBA moved to a neutral bias in February this year. It traded at 94.50 US cents at 3:12 pm after the RBA release on July 1, compared with 94.17 cents before. It traded higher because weak economic data in the US had sent the greenback lower last week.

Traders are pricing in 4 basis points of declines to the benchmark rate over the next 12 months, according to an index of swaps from Credit Suisse Group AG in Sydney.

Australian 10-year bonds yielded 3.56 percent on Tuesday, compared with 2.53 percent for equivalent US securities and 1.25 percent for similar German bonds. The Aussie dollar bought 69.04 euro cents.

Private-sector credit grew by 4.7 percent in the 12 months through May, the fastest annual pace since March 2009, according to the RBA data.

Australia’s treasurer in May announced cuts to spending on welfare and the public service and a new tax on the highest paid that began on July 1. Consumer confidence fell to its lowest level since August 2011, prior to the central bank’s most recent easing cycle, after the budget’s May 13 release.

RBA board member John Edwards said in a paper released last week that Australia would be able to weather the slump in mining investment, and Japan could return as the nation’s biggest trading partner, spurred by increasing liquefied natural gas exports.

Replacing 2-to-3 percent of gross domestic product with non-mining sources of growth over five to six years will be “onerous but not difficult,” Edwards wrote in the paper for the Lowy Institute titled “Beyond the Boom.” A weaker currency would also help, he said.

Looking ahead, continued accommodative monetary policy should provide support to demand and help growth to strengthen over time. Inflation is expected to be consistent with the 2–3 per cent target over the next two years, the RBA release stated.

On Tuesday, Australian shares fell 0.4 percent to end at a two-and-a-half month closing low while major banks turned weaker after the central bank kept its cash rate steady, outweighing positive data from top trading partner China.

Similarly, the S&P/ASX 200 index ended down 19.8 points at 5,375.9 points after touching a session high of 5,414.9. The benchmark had dropped 0.9 percent on Monday and lost 1.8 percent in June.

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