Australia holds rates at record low amid sluggish growth outlook

SYDNEY (BLOOMBERG) - The Reserve Bank of Australia (RBA) kept its benchmark interest rate unchanged amid a mixed picture of weaker growth signals, a stronger jobs market and a slowing of house prices.

Governor Philip Lowe and his board left the cash rate at a record-low 1.5 per cent on Tuesday (June 6), as expected by all economists surveyed by Bloomberg. Patchy data suggests that the economy's first-quarter growth will be weak ahead of numbers due Wednesday, with a report today showing net exports will be a bigger drag on gross domestic product than expected.

"Year-ended GDP (gross domestic product) growth is expected to have slowed in the March quarter, reflecting the quarter-to-quarter variation in the growth figures," Mr Lowe said in a statement. "Looking forward, economic growth is still expected to increase gradually over the next couple of years to a little above 3 per cent."

The Australian dollar was little changed, buying 74.73 US cents at 2.34pm in Sydney compared with 74.74 cents prior to the decision.

Most economists expect the RBA to hold or increase rates over the next year even as market bets for further easing creep higher amid a cloudier outlook. While May data showed strong employment gains and a surprise rebound in retail sales, construction has been soft and wage growth stagnant. Signs of a cooler housing market could also give the central bank leeway to ease down the track, after prices dropped in May for the first time in 18 months.

Housing "prices have been rising briskly in some markets, although there are some signs that these conditions are starting to ease", said Mr Lowe.

The RBA said in minutes from its May meeting that it was closely monitoring the labour and housing markets. Recent evidence suggests that the risks to both are finely balanced.

The jobless rate dropped to 5.7 per cent in May after a second straight month of solid employment gains, yet wage growth has been stagnant, suggesting a fair amount of slack in the market. Record levels of underemployment - where workers are willing and able to work more hours - helps to explain that.

The long-awaited cooling of east coast house prices may also be starting to feed through. Sydney prices dropped 1.3 per cent and Melbourne 1.7 per cent last month, according to the latest CoreLogic survey, while auction clearance rates in both cities have also been softer in recent weeks.

As far as consumer prices go, the central bank's expectations are largely being met. Headline inflation returned to the bottom end of the RBA's 2 per cent to 3 per cent target in the first three months of the year after spending nine quarters below it, but the key core measure is yet to catch up.

Wednesday's GDP report is expected to show just 0.3 per cent growth in the first quarter from the previous three months, according to economists' median estimate as of 2pm on Tuesday. Still, the RBA may be willing to look past a soft performance in the early part of 2017, mindful of some temporary weather-related factors.

Uncertainty remains over the second-quarter impact from Cyclone Debbie, which struck northern Queensland in late March knocking out mine-to-port rail links in the state's key coal producing region for several weeks. Debbie also caused widespread flooding, which had an impact on activity.