RBA holds rates at record low to spur growth in slowing economy

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(Oct 7): The Reserve Bank of Australia kept its key interest rate at a record low to spur hiring in an economy struggling to expand outside the property market.

The overnight cash rate target was held at 2.5 percent for a 14th month, Governor Glenn Stevens said in a statement today following an RBA board meeting in Sydney. The decision was predicted by all 26 economists surveyed by Bloomberg News and markets had priced in almost no chance of a move.

The central bank is trying to foster domestic growth, including residential construction, to soak up former mine workers and avoid a growth gap emerging as a resource investment boom fades. While a 7 percent drop in the currency last quarter may encourage companies to open their pocket books and invest, policy makers are struggling to cool property investment that is starting to distort the housing market.

“Increased investor participation in the property market is a concern and the introduction of macroprudential tools looks more likely,” Katrina Ell, an economist at Moody’s Analytics in Sydney, said before the decision. “Rate normalization will not be considered until the labor market shows sustained improvement.”

Australia’s economy slowed in the second quarter, expanding 0.5 percent from the previous three months, when it grew 1.1 percent, government data showed Sept. 3. Yet unemployment dropped to 6.1 percent in August from a 12-year high of 6.4 percent in July.

‘International Fad’

The central bank began indicating from mid-September that it planned measures to target speculation in the housing market by people buying residential property as investments. That was a U-turn on past dismissals of macroprudential measures, including Stevens’s description of them in August as an “international fad.”

The countervailing force in the economy is the local dollar, which has weakened more than 5 percent since the last policy meeting. The central bank said during its easing cycle that part of the reason for 2.25 percentage points of cuts was to offset some of the effect of the high Aussie dollar.

The RBA says the nation’s housing market is becoming “unbalanced,” with home-loan approvals to investors almost 90 percent higher in New South Wales state than two years ago and 50 percent higher in Victoria. While the central bank’s comments have centered around investor lending, it hasn’t yet spelled out what action regulators may take. Assistant Governor Malcolm Edey and Luci Ellis, head of the RBA’s financial stability unit, told lawmakers last week that they expect a preliminary announcement before the end of the year.

“There are also broader concerns with the macroeconomic risks associated with excessive speculative activity, since this activity can amplify the property price cycle and increase risks to households,” the central bank officials said in a statement to a parliamentary panel Oct. 2.