Published: Sat, February 09, 2019
Economy | By

Australia Keeps Rates on Hold Despite Pressure from Property Slump

Australia Keeps Rates on Hold Despite Pressure from Property Slump

After jumping overnight on Tuesday, the Pound Australian Dollar (GBP/AUD) exchange rate continued to gain on Wednesday as AUD investors began to price in the possibility of a rate cut from the Reserve Bank of Australia (RBA) later this year.

According to the St.George Bank morning report, the RBA Governor Lowe indicated the RBA no longer necessarily expects the next move in interest rates to be an increase, saying the risks to the cash rate are "more evenly balanced".

Further buoying Dollars exchange rates was the publication of the latest U.S. trade figures as the national trade deficit narrowed faster than expected in November.

Australia's central bank stared down calls to shift to a neutral bias amid a slumping property market, leaving its interest rate at a record low while acknowledging that downside risks have increased at home and overseas.

"Whether it's 50/ 50 or 55/ 45, I don't want to comment on that because our crystal ball isn't clear enough to know that", Lowe said. He said it seems RBA is underestimating the impact of the housing downturn on the economy.

Lowe said he was keeping a close eye on the labour market, which has been tightening since early 2017 with the unemployment rate down to over seven year lows of 5 percent.

However, despite its growth and inflation downgrades and increased downside risks, it retains the view that "further progress in reducing unemployment and having inflation return to target is expected" implying that it still believes that the next move in rates will be up rather than down. The yields in Australia fell yesterday on growing expectations of an RBA rate cut.

UBS sees inflation slowing down along with GDP and employment.

However, "we have the flexibility to do this if needed".

The Reserve will factor in house prices and jobs and wages growth when deciding interest rate moves.

That theme, which is playing out overseas around the world, will continue to be a concern for global growth on which Australia is dependent, and a potential catalyst for greater uncertainty.

"If we see mortgage rates rising more broadly, we might see the RBA become more willing to consider a rate cut in an effort to offset higher funding costs and support heavily indebted household balance sheets", he said.

"In a number of countries, growth in real wages has been weak or negative for some years".

With Brexit, the US-China trade war, and populist politics all threatening to dampen or even derail economic growth overseas, it also poses a threat to Australia's future prosperity.

Watch the full speech above and more analysis below.

"Understandably politicians around the world are responding to these concerns".

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