Australia’s central bank held its nerve in the face of a credit squeeze and tumbling property prices, keeping interest rates unchanged as it waits to see how consumers respond.
Governor Philip Lowe and his board kept the cash rate at 1.5 percent Tuesday -- as expected by money markets and economists -- saying in a statement: “the main domestic uncertainty continues to be the strength of household consumption in the context of weak growth in household income and falling housing prices in some cities.”
The Australian dollar was little changed, buying 70.84 U.S. cents at 2:33 p.m. in Sydney compared with 70.77 before the decision.
The Reserve Bank is under mounting pressure to end a 2-1/2 year pause in rate cuts amid signs consumers are hunkering down in response to a property slump. Sydney house prices have fallen 13 percent from a mid-2017 peak and bank lending is the weakest since the 1980s. But Lowe is taking heart from strong hiring and low unemployment, and holding out for Wednesday’s GDP report to gauge the state of consumption.
Australian unemployment has fallen to 5 percent as firms continue to hire and invest with interest rates at a record low. Indeed, the economy is in an unusual divide: solid jobs, investment and growth on one hand; with weak lending, a slumping housing market and faltering consumption on the other.
“Demand for credit by investors in the housing market has slowed noticeably as the dynamics of the housing market have changed,” Lowe said. “Growth in credit extended to owner-occupiers has eased further.”
The RBA has run easy policy to try to tighten the labor market sufficiently to spur wage growth and inflation. Core consumer-price gains have failed to reach the lower end of the central bank’s 2-3 percent target for the past three years.
The global backdrop looks more optimistic as the U.S. and China appear to be closing in on a trade deal. But the latter’s growth is slowing, which only adds to the clouds over the outlook Down Under. At the same time, the Aussie dollar has provided some stimulus by declining about 9 percent over the past year.
The economy is forecast to grow 0.4 percent in the final three months of 2018 from the prior quarter and 2.6 percent from a year earlier -- a reasonable result but not sufficient to further reduce spare capacity in the labor market. Prior to the report, Lowe is due to speak in Sydney on the housing market.
Source : Bloomberg