Oz central bank keeps interest low

Overseas Property | Michael Heath 5 Dec 2019

Australia's central bank kept interest rates unchanged as three cuts since June injected new life into the property market and raise the prospect of improved household spending and home-building.

Reserve Bank governor Philip Lowe kept the cash rate at 0.75 percent on Tuesday, in line with expectations of economists and money markets.

He's conserving his remaining conventional ammunition - estimated at two more rate cuts - to monitor the impact of earlier easing and recent government tax rebates.

The lower cash rate has "boosted asset prices, which in time should lead to increased spending, including on residential construction," he said. "Lower mortgage rates are also boosting aggregate household disposable income which, in time, will boost household spending."

The RBA's final meeting of the year sees policy makers no closer to reviving wage growth and inflation - trends that have bedeviled central banks worldwide.

Australia's economy has decelerated in the past 12 months as households limit spending, and sentiment remains weak despite the increased cash flow from interest rate and tax cuts. But the economy has kept advancing on strong population growth and state government infrastructure spending to keep pace with swelling cities.

Hiring has remained resilient in the face of slowing growth, though the labor market isn't tight enough - with unemployment at 5.3 percent - to spur the kind of wage gains the RBA wants.

"The key message from the RBA board's December statement is that it's going to take time. And with the 'long and variable lags in the transmission of monetary policy,' the board is in no rush to dole out the remaining conventional policy ammunition unless needed," said economist James McIntyre.

"With the currency remaining supportive, and the turnaround in housing markets alleviating one downside for household consumption, time is on the RBA's side - until February at least."

The clearest impact of easing has been in east coast house prices. Annualized gains over the past three months in Sydney and Melbourne are tracking in the mid-20 percent range.

Internationally, the RBA said risks remain tilted to the downside but have "lessened recently." The United States and China are trying to work out an initial trade agreement, offering hope of an eventual settlement to their dispute.

Lowe said domestic consumption is a key unknown. "Other sources of uncertainty include the effects of the drought and the evolution of the housing construction cycle," he said.

Lowe faces difficult decisions ahead. He has little rate ammunition remaining and the government is reluctant to boost fiscal spending as it tries to return the budget to surplus.

The governor has laid out what an eventual Australian version of quantitative easing might look like, though he doesn't expect the central bank will need to choose that path.

His bet is that the interest rate and tax cuts, combined with rising house prices, will encourage consumers to loosen their purse strings."

Bloomberg

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