The Reserve Bank of Australia has kept rates on hold but gave a strong hint that it will reduce borrowing costs again in the coming months.
After cutting the cash rate by 0.25 percentage points in February, the RBA announced after its monthly meeting on Tuesday that it was “appropriate” to keep rates steady at 2.25%.
But bank governor Glenn Stevens suggested that the rate would be cut again before too long as Australia faces weak domestic demand, rising unemployment and uncertainty about the direction of the global economy.
“Further easing of policy may be appropriate over the period ahead, in order to foster sustainable growth in demand and inflation consistent with the target,” he said in a statement.
“The board will further assess the case for such action at forthcoming meetings.”
The dollar spiked sharply to US78.4c immediately after the announcement while the S&P/ASX200 benchmark share index fell away after pushing close to a seven-year high of nearly 6,000 points earlier in the day on speculation of a cut. It closed down 25 points for the day at 5,933.9.
Stevens said that growth in Australia was “continuing at a below-trend pace, with domestic demand growth overall quite weak”.
The result was that unemployment had risen over the past year and there was likely to be a “degree of spare capacity for some time yet”.
Figures due to be released on Wednesday are expected to show that Australia’s economic growth slowed to 2.5% in 2014, strengthening the case for more monetary easing.
ANZ head of Australian economics Justin Fabo said another cut was likely, but was surprised it did not happen on Tuesday after last week’s shockingly weak business investment numbers.
“I can’t really rationalise it myself, because they’ve gone into another easing phase, presumably, and you don’t just do 25 basis points, because by their own admission that doesn’t do much,” he said.
“One of the key reasons we are surprised is that the capex survey last week, even though it’s got its limitations, even if you take a really optimistic view of what it was telling you, it was pretty bad.
“They know GDP [on Wednesday] is going to be pretty soft so putting all that together, it’s surprising they didn’t go today.”
There had been concern that another cut in rates would further inflate the housing market, especially in Sydney where figures this week showed that property prices had soared almost 14% in the year to February.
Stevens made a specific reference to Sydney prices in his statement but said that the bank was “working with other regulators to assess and contain risks that may arise from the housing market”.
TD Securities head of Asia-Pacific research Annette Beacher said concerns over rising property prices may have driven the rates decision, as well as strong growth in lending to property investors.
“We can only surmise that the surge in house prices and auction clearance rates stayed the RBA’s hand today, providing an offset to what was a dismal capex report last week and the surprise jump in the unemployment rate to 6.4% a few weeks ago,” she said.
Stevens said that although the dollar had “declined noticeably” in recent months, it remained “above most estimates of its fundamental value, particularly given the significant declines in key commodity prices”.
He added: “A lower exchange rate is likely to be needed to achieve balanced growth in the economy.”
Growth in the global economy continued at a moderate pace in 2014. A similar performance is expected by most observers in 2015, with the US economy continuing to strengthen, even as China’s growth slows a little from last year’s outcome.
