WRAPUP 1-Australia's central bank keeps rates low amid moderate growth

Tue Sep 2, 2014 1:14am EDT

* RBA keeps rates at 2.5 pct, signals more of the same

* Economy thought to have grown modest 0.4 pct in Q2

* Net exports take 0.9 ppt off Q2 GDP, govt spending muted

* Strength in home building, prices to support growth in H2

By Wayne Cole

SYDNEY, Sept 2 (Reuters) - Australia's central bank kept interest rates at record lows for the 12th straight policy meeting on Tuesday and seemed content to stay on the sidelines for a while to come as the economy wrestles with a waning mining boom.

The local dollar held at $0.9295 as the Reserve Bank of Australia (RBA) said the currency was overvalued by most measures but stopped short of actively trying to talk it down.

"Looking ahead, continued accommodative monetary policy should provide support to demand and help growth to strengthen over time," said RBA Governor Glenn Stevens, in a statement that made much use of the word "moderate" to describe the economy.

"On present indications, the most prudent course is likely to be a period of stability in interest rates."

All 23 analysts polled by Reuters had expected the benchmark rate to stay at 2.5 percent this month, where it has been since the last easing in August 2013. The vast majority assume the next move will be up, although not until the first half of 2015 at the earliest.

The RBA has sounded reluctant to ease again, in part for fear of adding fuel to an already hot housing market.

Home prices have picked up smartly in the past three months, taking annual growth to near 11 percent, according to property consultant RP Data.

Futures markets <0#YIB:> are still pricing in a modest chance of one more cut in rates, in large part because the economy is not growing fast enough to keep down unemployment, which recently hit a 12-year peak of 6.2 percent.

SLOWDOWN

Data on Australia's gross domestic product (GDP) in April-June is due on Wednesday and signs are that growth slowed markedly from the first quarter's surprisingly brisk 1.1 percent.

Median forecasts in a Reuters poll favour a rise of 0.4 percent for the second quarter compared with the first, the smallest in over a year.

Partly to blame was weakness in consumer spending over April and May, when sentiment was spooked by a government campaign to justify a budget of spending cuts and higher charges.

Australia's trade performance also turned into a drag after a very strong performance in the first quarter. The current account deficit yawned out to A$13.7 billion ($12.7 billion) from A$7.8 billion, the widest gap since late 2012.

With export volumes dipping 0.6 percent and imports rebounding by 3.7 percent, trade shaved 0.9 percentage point from GDP in the quarter.

Fortunately that was balanced by businesses rebuilding inventories, which looked to have added a whole percentage point to growth.

Also helping was a revival in home building as low rates and double-digit gains in house prices drive new supply after several fallow years for the sector.

That expansion looked to have a lot further to run, with approvals to build new homes climbing 2.5 percent in July, handily topping market forecasts of a 1.5 percent increase.

That left approvals 9.4 percent higher than in July last year, while growth in houses was even stronger at 14 percent. For the whole year to July, approvals were a record 195,227.

All that activity will be very much needed as mining spending is set to fall steeply over the next few years as a decade-long investment boom comes to maturity.

How this handover from mining proceeds is the single biggest uncertainty for policy makers and a major reason rates are likely to stay low for many months to come.

"The fall-off in investment spending by resources companies has a long way to go yet and will probably accelerate in the coming year," the RBA's Stevens cautioned last month.

"This impending further fall is captivating most of the commentators." (Reporting by Wayne Cole; Editing by Alan Raybould)

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