Australia’s central bank held its cash rate steady at a record low of 2.5 percent yesterday and hinted at a prolonged pause, saying a period of interest rate stability was prudent as the mining boom unwinds.
Reserve Bank of Australia (RBA) Governor Glenn Stevens said the board had decided to leave interest rates on hold for a fifth consecutive month, as expected by analysts.
Despite inflation coming in at a stronger-than-expected 0.8 percent in the final three months of last year, indicating a pickup in consumer spending, Stevens said growth and labor market prospects remained shaky as Australia’s decade-long Asia mining investment boom began to decline.
“Information becoming available over the summer suggests slightly firmer consumer demand and foreshadows a solid expansion in housing construction. Some indicators of business conditions and confidence have shown improvement,” he said.
“At the same time, with resources sector investment spending set to decline significantly, considerable structural change occurring and lingering uncertainty in some areas of the business community, near-term prospects for business investment remain subdued,” he said.
Stevens said the RBA expected “growth to remain below trend for a time yet and unemployment to rise further before it peaks.”
“In the board’s judgement, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target,” he said. “On present indications, the most prudent course is likely to be a period of stability in interest rates.”
The nation’s mining-driven economy expanded a modest 0.6 percent in the three months to September and 2.3 percent year-on-year, with the government describing it as “stuck in second gear” as it transitions to non-resources sector drivers of growth.
Unemployment is 5.8 percent, with the economy shedding 22,600 jobs in December.
The Australian dollar rose to US$0.8807 from US$0.8761 immediately prior to the decision, with investors welcoming the RBA’s more neutral tone.
“RBA appears to have moved to a neutral bias by referring to a period of stability in rates,” AMP Capital chief economist Shane Oliver said.
“Our view remains [that rates will be] on hold at least out to September,” he added.