RBA holds cash rate unchanged at 2.5%

RBA holds cash rate unchanged at 2.5%, sounds another warning on housing

By Fiona Rotherham

Oct. 7 (BusinessDesk) - The Reserve Bank of Australia has left the cash rate unchanged at 2.5 percent, as widely expected, though warned about the challenges of a weakening property market in the near term.

It has been largely successful in its jawboning attempts to cool what it saw as an overpriced housing market in Sydney and Melbourne with real estate agents reporting declining numbers attending auctions. The RBA had stepped up its warnings about falling house prices as well as suggesting the use of "macroprudential tools" such as stricter testing of borrowers' ability to withstand interest rates rises.

The latest statement said the most prudent course was likely to be a "period of stability" in interest rates. Long-term interest rates and risk spreads remain very low and the markets appear to think it unlikely there would be a rise in global interest rates or other adverse event over the period ahead, it said.

Growth in the global economy was continuing at a moderate pace and while some data suggested a slowing in recent months in China's growth, it was generally in line with policymakers' objectives.

Last month the RBA hardened its language on the Australian dollar, saying the currency was high relative to fundamental value. Today it said the recent exchange rate decline reflected a stronger US dollar. But the bank warned the Australian dollar remained high by historical standards, particularly since there had been further commodity price falls. The Australian dollar was "offering less assistance than would normally be expected in achieving balanced growth in the economy," governor Glenn Stevens said.

Most data was consistent with moderate growth in the Australian economy and the RBA said overall it expected growth to be a little below trend for the next several quarters. There had been a pick up in volatility in some financial markets in recent weeks and while commodity prices remained high in historical terms, some of those important to Australia had declined further in recent months, the RBA said.

The Australian dollar traded at 87.46 US cents at 5pm in Wellington from 87.53 cents immediately before the release. The New Zealand dollar traded at 89.12 Australian cents at 5pm in Wellington from 89.09 cents immediately before the release.

On the labour front, Stevens said high unemployment was unlikely to decline for some time yet with the labour market having a degree of "spare capacity".

"Growth in wages has declined noticeably and is expected to remain relatively modest over the period ahead, which should keep inflation consistent with the target even with lower levels of the exchange rate." he said.

He repeated that inflation was expected to be consistent with the 2–3 percent target over the next two years.

(BusinessDesk)

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