Australian central bank keeps interest rate on hold

SYDNEY • Australia kept its key interest rate unchanged, remaining in a form of policy paralysis as housing is too hot to allow an easing and the economy too weak to absorb a tightening.

Reserve Bank of Australia (RBA) governor Philip Lowe and his board left the cash rate at a record low of 1.5 per cent yesterday, after Sydney property prices soared last month at the fastest annual pace in almost 15 years and unemployment climbed to the highest level since the beginning of last year.

"Recent data is consistent with ongoing moderate growth," said Mr Lowe after the decision.

"Some indicators of conditions in the labour market have softened recently. In particular, the unemployment rate has moved a little higher and employment growth is modest."

The Australian dollar fell to 75.83 US cents at 2.34pm in Sydney, from 76.05 cents before the announcement. Against the Singdollar, the Australian dollar was trading at 0.94 cent.

Australia's economy is in a holding pattern as growth fails to spur significant hiring, resulting in weak wages and subdued inflation.

The main bright spot is offshore, where major regions of the global economy are showing signs of a synchronised upswing. At the same time, east coast property's strength prompted the RBA last week to tighten lending restrictions, particularly for residential investors.

Said QIC chief economic Matthew Peter: "The 'can't cut, can't hike' dilemma means Australia is now in the unenviable position that both policy arms of macroeconomic stability - fiscal and monetary policy - appear to be sidelined.

"Fiscal policy through a political impasse and monetary policy through a cornered RBA."

US policymakers are likely to be more influential Down Under via Federal Reserve rate increases and their impact on the local exchange rate, added Mr Peter.

The Aussie dollar is up more than 5 per cent this year, the second-best performer among a group of 10 currencies tracked by Bloomberg.

Australia has enjoyed an Indian summer for commodity prices as Chinese stimulus last year drove manufacturing gauges higher and boosted demand for iron ore and coal. Traditional service industries are also benefiting from the world's No. 2 economy, particularly tourism: Australia had a record 1.2 million visitors from China last year.

Said Mr Peter: "The RBA may get lucky and be able to sit on a 1.5 per cent cash rate over this year and next. But this requires three preconditions.

"First, the Australian economy must hold up over the remainder of 2017. Second, the Fed must stay the course of monetary tightening and China must continue to follow the Fed. And third, macro-prudential regulations must successfully quell the Melbourne and Sydney housing markets."

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A version of this article appeared in the print edition of The Straits Times on April 05, 2017, with the headline 'Australian central bank keeps interest rate on hold'. Print Edition | Subscribe