Pedestrians walk past the Reserve Bank of Australia headquarters in Sydney. The central bank will hold interest rates at a record-low of 2%, after quarter-point cuts in May and February, economists predict.
Bloomberg
Sydney
Australia’s central bank will keep its policy powder dry today as property bubbles in the nation’s biggest cities raise financial stability risks, while the turmoil in Greece pushes down the South Pacific nation’s dollar.
The Reserve Bank of Australia will hold interest rates at a record-low of 2%, economists and markets predict, after quarter-point cuts in May and February. Sydney and Melbourne house prices soared in June by the most since regulators announced plans to crack down on lending to investors.
Australia’s response to the unwinding of its record mining investment boom has fallen to the central bank as lawmakers dismiss calls at home and abroad to speed up reform and deploy stimulus to boost growth. Aside from rate cuts, the only aid Governor Glenn Stevens can hope for is a decline in the local dollar. It dropped below 75 US cents to a six-year low yesterday, as demand for Australia’s higher-yielding assets shrank on concern Greek voters’ decision in a referendum to reject austerity would drive Greece out of the euro.
“Developments in housing remain a key constraint,” said Stephen Walters, chief economist for Australia at JPMorgan Chase & Co. “The RBA is in a holding pattern as officials watch developments domestically and offshore, including the troubling events in Europe.” Sydney home prices jumped 16.2% in June from a year earlier and advanced 10.2% in Melbourne following an “instant buyer reaction” to the central bank’s rate cuts in February and May, CoreLogic Inc’s head of research in Australia, Tim Lawless said July 1.
Since the RBA’s last board meeting Australia’s jobless rate fell to 6%, even as some analysts questioned the data, business confidence improved and the economy recorded faster- than-forecast growth in the first three months of the year.
Other reports showed retail sales in May were weaker than expected, while the trade deficit was wider than economists forecast for a third-straight month.
The Australian dollar dropped 0.2% to 75.10 US cents as of 6 pm Sydney time yesterday and touched 74.52, the weakest since May 2009.
Sixty-one per cent of Greek voters voted against yielding to further austerity demanded by creditors, giving their backing to the position of Prime Minister Alexis Tsipras and leaving Europe’s leaders to determine if the renegade nation can remain in the euro. The results mean Greece exiting the currency union is now the base-case scenario, JPMorgan said.
In China, most stocks fell yesterday as a fresh round of government support measures failed to spark gains outside the largest state-run companies.
The Aussie had advanced 1.3% last quarter, thwarting a depreciation Stevens said is needed to stem a slump in manufacturing.
Helping keep the currency elevated – even as commodity prices have fallen 25% in the past 12 months – have been higher yields on Australian assets that are drawing in foreign capital. The country attracted more than 25% of Chinese investment offshore in commercial property worldwide in the first three months of 2015 as investors there sought refuge from volatile local markets.
Central bank holdings of Australian dollars surged 12% to a record A$149.4bn ($112bn) in the first quarter, data published June 30 by the International Monetary Fund show.
All 27 economists surveyed by Bloomberg expect the RBA to keep rates on hold at its July meeting while traders see only an 8% chance of a reduction.
A rate cut in the final quarter is predicted by nine economists as stagnant wages, a forecast record decline in business investment and plunging commodity prices point to a darkening outlook for the economy. Swaps indicate 55% odds for at least one easing by year-end. Stevens has said he’s prepared to ease rates further, while noting the diminishing returns of further cuts to an already very low policy rate.
“Whether you go lower with rates or not now is not an economic question really,” said Bob Gregory, a professor at Australian National University in Canberra who has studied the economy for almost half a century. “At these low rates, you don’t get anything by going lower, you just go lower because you want to be seen to be doing something.”
