Australia keeps key rate at record low in Stevens' swansong

People wait for a train at Circular Quay near the harbour in Sydney on July 5, 2016. Australia's central bank stood pat on interest rates on Tuesday (Sept 6).
People wait for a train at Circular Quay near the harbour in Sydney on July 5, 2016. Australia's central bank stood pat on interest rates on Tuesday (Sept 6).PHOTO: AFP

SYDNEY (BLOOMBERG) - Australia's central bank stood pat on interest rates on Tuesday (Sept 6) as policy makers await further inflation data and the US Federal Reserve's next move.

In his final meeting, Reserve Bank of Australia governor Glenn Stevens and his board left the cash rate at 1.5 per cent Tuesday, as forecast by all 26 economists surveyed. The central bank has cut twice in the past four months and traders see little chance of further easing until after the release of third-quarter consumer-prices data late October.

"Inflation remains quite low," Mr Stevens said in a statement. "Given very subdued growth in labor costs and very low cost pressures elsewhere in the world, this is expected to remain the case for some time."

Australia's economy is being underpinned by increased resource exports, a housing construction boom and an uptick in tourism and education helped by a currency that's fallen from its mining-boom heights. But anemic wage growth and weak inflation are signaling plenty of spare capacity which, along with the impact from zero or negative rates in Japan and Europe, prompted the central bank to last month take borrowing costs to a record low.

"In Australia, recent data suggest that overall growth is continuing, despite a very large decline in business investment, helped by growth in other areas of domestic demand and exports," Mr Stevens said. "Labor market indicators continue to be somewhat mixed, but suggest continued expansion in employment in the near term."

The Australian dollar was little changed after the decision, buying 76.22 US cents at 2:43 pm in Sydney, compared with 76.29 cents before the statement.

Cross-currents in global monetary policy have boosted the Aussie, which has risen about 11 per cent since a mid-January trough. That means the RBA will be closely watching its US counterpart; if the Fed bites the bullet and tightens this year, that may see a depreciation in the local dollar which should aid currency-sensitive services industries.

"The global economy is continuing to grow, at a lower than average pace," Mr Stevens said Tuesday. "Several advanced economies have recorded improved conditions over the past year, but conditions have become more difficult for a number of emerging market economies. Actions by Chinese policymakers have been supporting growth, but the underlying pace of China's growth appears to be moderating."

Australia is also grappling with the developed-world quandary of weak inflation - partly a factor of the economy adjusting after the mining boom to regain competitiveness and partly imported from abroad. The RBA has lately become more sanguine on Sydney's housing boom, believing that macro- prudential measures in place are preventing poor lending practices.

"Taking account of the available information, and having eased monetary policy at its May and August meetings, the board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time," Mr Stevens said.

Traders predict incoming governor Philip Lowe could resume cutting the benchmark rate by December, though they see a move in the first quarter of next year as more likely.

Outside rates and a weaker currency, fiscal policy is the other obvious lever to aid the economy. But Treasurer Scott Morrison has made it clear - following warnings from rating agencies about the country's AAA score - that he's focused on paying down debt instead of using low rates to borrow to fund infrastructure projects that could increase productivity.

"Australia has always been a net importer of capital, especially in the private sector," Mr Morrison said in a Bloomberg Address late last month. As a result, "we have less head room for government debt than other advanced economies that fund their own debt, and that's why ratings agencies tend to be very focused on Australia's deficit and debt position."