Australia central bank holds rates, Aussie dollar rises

Pedestrians walk past the main entrance to the Reserve Bank of Australia's head office in Sydney.
Pedestrians walk past the main entrance to the Reserve Bank of Australia's head office in Sydney. PHOTO: REUTERS

SYDNEY (REUTERS) - Australia's central bank held rates steady for a third month on Tuesday (Nov 1), with markets wagering a windfall from surging export prices and concerns over a hot housing market could mean its five-year easing cycle was all but done.

The local dollar firmed after the Reserve Bank of Australia (RBA) ended its monthly policy meeting with rates unchanged at a record low of 1.5 per cent and offered no explicit easing bias.

The Aussie rose a third of a cent to US$0.7655. It also jumped against the Singapore dollar after the rate announcement to S$1.0646 as at 12.47pm, up 0.6 per cent from its close on Monday.

RBS governor Philip Lowe wrote: "Over the next year, the economy is forecast to grow at close to its potential rate, before gradually strengthening."

Inflation was expected to remain low for some time, but would "pick up gradually over the next two years".

The steady decision was widely expected given policymakers had sounded optimistic on the economic outlook amid higher prices for key commodity exports. The jump in coal alone could be worth an extra A$25 billion in annual revenue if sustained.

A Reuters poll of 60 analysts had found all but five tipped no change this week. A majority saw scope for one more easing next year, but investors were lengthening the odds on a move.

Interbank futures imply a one-in-three chance of a cut next year, compared to one-in-two previously.

Low inflation and a lacklustre labour market could open the door to further easing. Underlying inflation is stuck at a record low of 1.5 per cent and seems likely to remain below the RBA's 2 to 3 per cent target band for another year or more.

Employment growth has also disappointed in recent months, while being heavily skewed towards part-time jobs.

A chief argument against the need for further stimulus is a recent acceleration of house price gains in Australia's two largest cities, Sydney and Melbourne.

The trend was highlighted by Mr Lowe who said prices in some markets "have been rising briskly" over the past few months.

Figures from property consultant CoreLogic out on Tuesday showed values galloped 10.9 per cent higher in October from a year earlier, while Melbourne boasted a 9.1 per cent gain.

Prices rose for the 10th month across all the major cities to be up 7.5 per cent for the year.

The inexorable ascent of prices has taken homes out of the reach of many first-time buyers and fuelled concerns about excessive borrowing by property investors.

"With ongoing strong value growth and the debate around affordability gathering some momentum, there is likely to be further caution by the Reserve Bank around future rate cuts," said CoreLogic research director Tim Lawless.

Some feared prices must eventually deflate, particularly as there was a huge pipeline of new apartments coming on stream.

Lawless noted building approvals in Brisbane, for instance, suggested the existing stock of units could expand by more than a quarter over the next two years.