SYDNEY, Apr 2: Australia’s central bank kept its main cash rate at a record low of 3.0 percent as widely expected on Tuesday, but left open the possibility of further easing if the economy failed to respond to past cuts.
The Australian dollar held steady as the market had seen almost no chance of a cut from the Reserve Bank of Australia (RBA) at its monthly policy meeting.
In an echo of his March statement, RBA governor Glenn Stevens said there were signs past easing was working as desired. The central bank has cut rates by 175 basis points since November 2011.
‘There are a number of indications that the substantial easing of monetary policy during late 2011 and 2012 is having an expansionary effect on the economy,’ said Stevens. ‘Further such effects can be expected to emerge over time.’
Yet neither did he rule out fresh action, citing in part the need to offset the drag from a strong Australian dollar.
‘The inflation outlook, as assessed at present, would afford scope to ease policy further, should that be necessary to support demand,’ said Stevens.
The reiteration of an easing bias was important as some analysts had speculated the bank might drop the phrase, signalling a shift to a more neutral stance.
‘Their ability to drop the easing bias is limited by the strength of the currency,’ said Matthew Johnson, interest rate strategist at UBS.
‘They are sounding a little more confident about some of the things improving in the economy. I think the RBA is on hold for the rest of the year.’
Financial markets had priced in scant chance of an easing this month, while a Reuters poll of 22 analysts had found all expected the RBA to hold steady.
Investors continue to wager on one more cut this year, though they had lengthened the odds of a move given domestic data had improved recently.
WEALTH RISES, BUT SO DOES A$
Data out earlier Tuesday suggested lower mortgage rates were breathing some life into the long moribund housing market.
Figures from property consultant RP Data-Rismark showed home prices climbed 1.3 percent in March from February. For the whole of the first quarter, prices were up a solid 2.8 percent, the largest increase in almost three years.
That, combined with rising share prices, has helped generate a recovery in household wealth which had been badly hit in the wake of the global financial crisis. Since wealth is highly correlated with consumption, that should bode well for stronger spending in coming months.
Yet it is still far from certain that the economy will be able to cope when the country’s long boom in mining investment finally plateaus this year.
In particular, a stubbornly high currency has been a major headwind for sectors such as manufacturing. The local dollar is near a 28-year peak when measured against a basket of major currencies, above where it was when the RBA started cutting rates back in November 2011.
This is a major reason many analysts still suspect there might be more easing to come.
‘They have left the door open for a rate cut and that will occur if investment intentions remain weak, if retail sales are soft and if the labour market retracts from the gains in the last few months,’ said Hans Kunnen, chief economist at St George.
(agencies)
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