AUSTRALIA’S central bank left policy unchanged as it waits to see how a combination of interest-rate cuts and tax relief impact the economy, with Sydney property prices already showing renewed strength.
Governor Philip Lowe kept the cash rate at a record-low 1%, as widely expected, to gauge if the economy is entering the “gentle turn” he predicted last month. Markets and economists still expect him to have to ease again later this year as the US-China conflict reverberates across the world.
“There are further signs of a turnaround in established housing markets, especially in Sydney and Melbourne,” Lowe said in his statement. “The main domestic uncertainty continues to be the outlook for consumption, although a pick-up in growth in household disposable income and a stabilization of the housing market are expected to support spending.”
The Reserve Bank of Australia (RBA) is hoping that recent tax cuts for households revive consumption, and a weakening currency lifts exporters and helps shield the economy from global upheaval. Yet with the country’s biggest exports — iron ore and coal — tumbling and Australians grappling with record debt and weak wage growth, it will likely prove tough to avoid further rate cuts.
“It is reasonable to expect that an extended period of low interest rates will be required,” Lowe said. “The board will continue to monitor developments, including in the labor market, and ease monetary policy further if needed.”
The Australian dollar rose to 67.22 US cents at 4:17 p.m. in Sydney from 66.94 cents prior to the decision.
Easier policy is already boosting the usual suspects. National house prices rose the most in almost 2 1/2-years in August, with the two biggest cities leading the way: Sydney jumped 1.6% and Melbourne climbed 1.4%.
Lowe cut rates in June and July to try to counter the global turmoil and slowing local growth — with the economy forecast to have expanded an anemic annual 1.4% in the second quarter, half its speed limit. The government meanwhile has begun providing tax rebates promised ahead of May’s election that are now reaching Australians’ bank accounts.
Yet iron ore — the country’s biggest export — tumbled 28% last month, its worst decline on record. And President Donald Trump’s tariffs are harming global sentiment, which filters into a small, open economy like Australia. The International Monetary Fund in July further cut its world growth outlook, already the lowest since the financial crisis, amid the uncertainty.
“The trade and technology disputes are affecting international trade flows and investment as businesses scale back spending plans,” the governor said. “The persistent downside risks to the global economy combined with subdued inflation have led a number of central banks to reduce interest rates this year and further monetary easing is widely expected.”
Economists reckon Lowe will have to cut to 0.5% by March, a level the RBA has suggested could be its lower bound, opening up the possibility of unorthodox policy in 2020.
“The RBA know they are going to cut. We know they are going to cut. Yet we will have to wait at least another month,” said Callam Pickering, an economist at global jobs website Indeed, who previously worked at the central bank.
“Following a rate move, it is typical of the Reserve Bank to take a few months to assess how the economy responds.” — Bloomberg