December 2, 2014 / 2:01 AM / 5 years ago

Australia's RBA keeps rates on hold amid commodity selloff

SYDNEY (Reuters) - Australia’s central bank kept interest rates at record lows for a 16th straight month on Tuesday, saying sub-par economic growth could extend this unusually lengthy period of stability for some time yet.

A businessman walks past the Reserve Bank of Australia in Sydney February 4, 2014. REUTERS/Jason Reed

There was little relief for the hard-pressed local dollar as the Reserve Bank of Australia (RBA) repeated the currency was overvalued given the ongoing slide in prices for many of the country’s commodity exports.

“Overall, the Bank still expects growth to be a little below trend for the next several quarters,” said RBA Governor Glenn Stevens following the bank’s monthly policy meeting.

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

The cash rate has been at 2.5 percent since August last year as the A$1.6 trillion ($1.36 trillion) economy struggles with the winding back of mining investment and declining terms of trade.

So sharp has been the fall in export prices, notably for iron ore, that investors are wagering rates might have to be cut again. Interbank futures <0#YIB:> imply around a 60 percent probability of an easing by August next year, even though RBA officials have shown no sign of contemplating such a move.

Perhaps sensing the shifting winds, Deutsche Bank has changed its call and now predicts the RBA will lower rates by 50 basis points in two instalments over 2015.

The bank’s chief economist, Adam Boyton, cited a moderation in the housing market, a shrinking terms of trade and his expectation of rising unemployment as reasons for the change.

NET EXPORTS DRIVE GROWTH

The drop in commodity prices has certainly eaten into sources of national income, from export earnings to company profits, wages and tax receipts.

Yet a decade-long boom in mining investment is also greatly boosting the volume of resources Australia can ship abroad. As a result net exports added a healthy 0.8 percentage points to gross domestic product (GDP) in the third quarter, reinforcing expectations for a solid rise in growth overall. ECONAU

The GDP report is due on Wednesday and analysts have been looking for a robust rise of 0.7 percent in the quarter and 3.1 percent for the year. The latter would be faster than the United States which only managed growth of 2.4 percent despite all the talk of its global outperformance.

Tuesday’s data also produced more evidence that low mortgage rates were working to revive the housing market.

Approvals to build new homes surged 11.4 percent in October, completely reversing a big fall in September and keeping the annualised pace of approvals near record peaks.

“This means that the peak in this residential construction upturn will be extended well into 2015,” said Diana Mousina, an economist at Commonwealth Bank.

“This has important ramifications for other parts of the economy because the construction process has a sizeable multiplier effect and is very labour intensive.”

Editing by Eric Meijer

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