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WRAPUP 1-Australia c.bank holds rates, policy to stay accommodative
April 1, 2014 / 4:20 AM / 4 years ago

WRAPUP 1-Australia c.bank holds rates, policy to stay accommodative

* RBA keeps rates at 2.5 percent for 8th month, outlook stable

* Pick up in housing, consumption and exports balance mining slowdown

* Surge in home prices, investment borrowing being watched closely

By Wayne Cole

SYDNEY, April 1 (Reuters) - Australia’s central bank kept rates at record lows on Tuesday, saying policy would remain stimulative in order to boost demand and offset the drag from a cooling mining boom.

The Reserve Bank of Australia (RBA) conceded that unemployment was likely to rise a little further, but pointed to a pick up in consumer spending and a robust expansion in home building as reasons for optimism.

“Looking ahead, continued accommodative monetary policy should provide support to demand, and help growth to strengthen over time,” RBA Governor Glenn Stevens said in a brief statement after the bank’s April policy meeting.

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

The central bank had been considered certain to hold rates at 2.5 percent, where they have been since a cut last August. In February, the bank all but closed the door on further easing given evidence past cuts were percolating through the economy.

A Reuters poll of 20 economists had found all expected a steady outcome this week, while most suspected the next move would be upward, albeit not until 2015.

The futures market <0#YIB:> implies almost no chance of a further easing, and has priced in a small probability of a rate rise late this year.

The market reaction was choppy with the local dollar first rising to a four-month peak at $0.9310 before lapsing back to $0.9265.

Stevens noted that the currency was still high by historical standards and its recent rise would not assist the economy, but stopped short of outright talking it down.

“It’s a bit of tacit acknowledgment that there’s not much the RBA can do about the exchange rate,” said Su-Lin Ong, a senior economist at RBC Capital Markets.

“To have said absolutely nothing new on the exchange rate would have been a green light for it to go a lot higher, but adding that small line has just sort of capped it for now.”

BORROWING BINGE A CONCERN

There was further evidence on Tuesday that low mortgage rates were stimulating the housing market, perhaps too much.

Figures from property consultant RPData-Rismark showed home prices across Australia’s major cities jumped 2.3 percent in March, from the previous month. That left them a hefty 10.6 percent higher than March last year, the fastest pace in almost four years.

Rising home prices have so far been considered by policymakers as necessary to encourage a much-needed revival in home building, and signs are it is working.

Approvals to build new homes have taken off in recent months and are now growing at an annual pace of almost 35 percent.

“We are going to have a boom in residential construction over the next couple of years. That is very much on track,” Stevens said just last week.

However, the bank has been less sanguine about a rush of borrowing to buy homes as investments, with the value of new loans granted climbing to a record peak at the end of last year.

Officials have taken to playing the role of the scold, warning investors that double-digit prices gains cannot last. This is a tactic that has had some success in the past, notably during the last really big price boom in the early 2000‘s.

“Over the long term, I don’t believe such a strong pace of growth can be sustained - we expect housing market conditions to cool down as the year progresses,” said RP Data research director Tim Lawless of the latest rise in home prices.

“If the pace of capital gains doesn’t slow, we may see higher interest rates realised much earlier than previously expected,” he added, ominously. (Reporting by Wayne Cole; Editing by Eric Meijer & Kim Coghill)

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