Reserve Bank of Australia holds interest rates at 2 pct, tempers call for A$ fall

By: | Updated: August 4, 2015 10:58 AM

The Reserve Bank of Australia (RBA) kept its interest rate (cash) steady at a record low of 2.0 percent on Tuesday, a widely expected decision as it waits to judge the impact of past easings.

The Reserve Bank of Australia (RBA) kept its interest rate (cash) steady at a record low of 2.0 percent on Tuesday, a widely expected decision as it waits to judge the impact of past easings.

Australia’s central bank held interest rates at record lows in a widely expected decision, but surprised markets by toning down calls for a further fall in the local dollar.

The currency jumped half a U.S. cent to $0.7348  after the Reserve Bank of Australia (RBA) dropped a reference to a further decline being necessary, saying only that the Aussie was adjusting to weak commodity prices.

The statement following its monthly policy meeting seemed to mark a new phase in a long campaign to talk down the currency, which hit a six-year low last week.

“It suggests maybe the Aussie is closer to appropriate levels,” said Su-Lin Ong, a senior economist at RBC Capital Markets.

“It also suggests that the easing bias, which was already pretty modest, is very mild,” she added. “Part of the rationale around having an easing bias and threatening to cut, is to get your currency lower.”

Investors reacted by lengthening the odds of a further cut in the 2 percent cash rate with interbank futures <0#YIB:> now implying a 60 percent chance of a move by December, from 72 percent earlier in the day.

RBA Governor Glenn Stevens has recently sounded reluctant to cut again as he balances the need to underpin a sluggish economy against the risk of over stimulating an already hot housing market.

A Reuters poll of 21 analysts had found all but one expected a steady outcome this week and only six looked for another easing over time.

The central bank has already eased twice this year as the unwinding of a once-in-a-century mining boom hammered business investment and national income.

The baleful impact of falling commodity prices was all too evident in monthly trade figures out on Tuesday. The deficit widened to A$2.9 billion in June, bringing the shortfall for the whole second quarter to an eye-popping A$9.9 billion.

HOUSING DRIVES DEMAND

Yet the lowest rates in memory have been supporting consumer demand for goods, services and housing. Figures form the  Australian Bureau of Statistics out on Tuesday showed retail sales outpaced forecasts with a rise of 0.7 percent in June.

Sales for the second quarter also beat expectations with an inflation-adjusted increase of 0.8 percent, thanks in large part to the spillovers from a booming housing market.

Home building has been on a tear for months and looks set to remain strong for some time to come with approvals to build new property near all-time highs.

Red-hot demand has sent home prices through the roof with Sydney boasting annual gains of more than 18 percent and Melbourne over 11 percent.

The total value of housing has climbed half a trillion dollars in the past 12 months to reach A$6 trillion, making home owners feel wealthier.

However, a sustained surge in borrowing for property investment has not been nearly so welcome.

Regulators have clamped down on lending by banks forcing them to jack up mortgage rates for investment properties while increasing the required deposits for loans.

Just last month, RBA’s Stevens cautioned that yet lower rates might backfire if they encouraged an upward spiral in  borrowing that ultimately led to a bust in home prices.

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