Australia central bank signals further cut after unexpectedly keeping rate steady

Australia's central bank kept its cash rate steady at a record low of 2.25 per cent on Tuesday, surprising some who had looked for another easing to follow February's cut. -- PHOTO: AFP  
Australia's central bank kept its cash rate steady at a record low of 2.25 per cent on Tuesday, surprising some who had looked for another easing to follow February's cut. -- PHOTO: AFP  

SYDNEY (Bloomberg) - The Reserve Bank of Australia said further interest rate cuts could be needed to bolster growth after it unexpectedly left its benchmark unchanged. The currency rose.

"Further easing of policy may be appropriate over the period ahead, in order to foster sustainable growth in demand and inflation consistent with the target," Governor Glenn Stevens said in a statement Tuesday after leaving the overnight cash rate at 2.25 per cent. The decision was predicted by 11 of 29 economists surveyed by Bloomberg News, while 18 saw a cut.

Australia is on track to record an expansion below its economic potential for six of the past seven years, the longest stretch since the nation's last recession in 1991. Today's pause reflects concerns that lower rates will further encourage a rampant Sydney housing market.

"The RBA's decision to leave rates unchanged after cutting at their first meeting of the year may reflect concern about the heat that is returning to the housing market," said Jasmin Argyrou, senior investment manager at Aberdeen Asset Management Ltd.

"Another rate cut will eventually be needed to cushion the economy from a slowdown in mining investment and sluggish non- resources sectors. Low inflation here and overseas will make the decision easier when the time comes."

Stevens needs a lower currency to lift profitability and hiring in manufacturing and services, in order to offset a plunge in the price of iron ore. The Australian dollar jumped on the decision and was trading at 78.13 U.S. cents at 3:02 p.m. in Sydney from 77.74 cents shortly before the announcement.

Needed The currency "remains above most estimates of its fundamental value, particularly given the significant declines in key commodity prices," Stevens said, reiterating past comments. "A lower exchange rate is likely to be needed to achieve balanced growth in the economy."

The RBA's earlier rate cuts have stoked the country's housing market. The proportion of successful house auctions in Sydney was above 80 per cent at the weekend for the fourth week in a row, the longest stretch on record. Prices in Australia's biggest city climbed 13.7 per cent in February from a year earlier, the largest gain since September.

"The bank is working with other regulators to assess and contain risks that may arise from the housing market," Stevens said on Tuesday.

Stevens's central bank counterparts abroad have eased policy to counter a global wave of disinflation. China, Australia's biggest trading partner, cut interest rates on Saturday before a yearly gathering of the Asian nation's leadership. Economists expect Premier Li Keqiang will announce a growth target of around 7 per cent for 2015, down from 7.5 per cent last year.

The price of Australia's key export, iron ore, dropped almost 50 per cent drop last year. The metal accounts for more than A$1 in A$5 of Australia's export income.

The RBA has little to worry about in terms of inflation, after data last week showed wages growth matched the weakest level on record.

"The economy is likely to be operating with a degree of spare capacity for some time yet," Stevens said on Tuesday. "With growth in labor costs subdued, it appears likely that inflation will remain consistent with the target over the next one to two years, even with a lower exchange rate."