Australia’s central bank has kept official interest rates on hold, bucking market expectations of a second cut in the space of two months.
The Reserve Bank of Australia (RBA) announced on Tuesday the cash rate would remain at the historic low of 2.25% “for the time being”, but kept the door open to further reductions in coming months in a bid to address sluggish economic growth.
The decision prompted a spike in the value of the Australian dollar because markets had been pricing in expectations of a rate cut.
The RBA was holding firm two months after it approved a reduction by a quarter of a percentage point, resulting in the lowest cash rate target in the 25 years that the central bank has published such figures.
In a nod to concerns expressed by economists about Sydney’s heated property market, the RBA governor, Glenn Stevens, acknowledged home prices in the New South Wales capital continued to rise strongly, while trends in other cities varied.
Stevens said the RBA was “working with other regulators to assess and contain risks that may arise from the housing market”.
“Growth in lending to investors in housing assets is stronger than to owner-occupiers, though neither appears to be picking up further at present,” Stevens said after the board’s monthly meeting on monetary policy on Tuesday.
“Lending to businesses, on the other hand, has been strengthening recently.”
Stevens said economic growth in Australia continued at a below-trend pace “with overall domestic demand growth quite weak as business capital expenditure falls”, fuelling increases in the unemployment rate.
He said joblessness would continue to be an issue “for some time yet” and the Australian dollar was likely to depreciate further against the US dollar “particularly given the significant declines in key commodity prices”.
Stevens said a lower exchange rate was “likely to be needed to achieve balanced growth in the economy”.
“At today’s meeting the board judged that it was appropriate to hold interest rates steady for the time being,” Stevens said.
“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. The board will continue to assess the case for such action at forthcoming meetings.”
Dr Timo Henckel, from the Australian National University’s Centre for Applied Macroeconomic Analysis, said Sydney’s inflated housing market remained a concern, as prices rose 3.3% month-on-month in March.
“The central dilemma for the RBA persists: spur growth with loose monetary policy and risk exaggerated asset prices that lead to a misallocation of capital and costly adjustment in the future, or hold the line on monetary policy and risk an imminent weakening of aggregate demand,” he said.
Lindsay David, of LF Economics and author of the book Australia: Boom to Bust, said a further rate cut could “add more fuel to the fire”.
“It’s a credit-fuelled real estate bubble,” he said.
But the National Retail Association credited the RBA’s previous rate cut for encouraging retail trade figures published on Tuesday showing a 0.7% increase in turnover in February, seasonally adjusted.
The Australian Bureau of Statistics said the largest contributor to the February rise was food retailing (1.2%) while increases were also recored in household goods (1.8%) and other retailing (1.3%).
“There were falls in department stores (-3.2%), cafes, restaurants and takeaway food services (-0.4%) and clothing, footwear and personal accessory retailing (-0.2%),” the bureau said.
The RBA is due to consider monetary policy at its next meeting on 5 May, a week before the Abbott government delivers its second budget.
The finance minister, Mathias Cormann, said the government would seek to repair the budget in an economically responsible way. He said the government was contending with global economic headwinds including plummeting commodity prices, blowing a hole in revenue.
In a sign of the troubles caused by the sharp drop in iron ore prices, the Australian company Atlas Iron suspended trading on the stock exchange on Tuesday pending a review of its operations.
Nine business groups issued a joint statement on Tuesday calling on all sides of politics to support “difficult but necessary” economic reforms aimed at improving productivity and creating wealth.
The groups – which included the Australian Chamber of Commerce and Industry, the Business Council and the Australian Industry Group – said the alternative was “a path to economic despair”.
The opposition leader, Bill Shorten, said Labor would “support reform which is fair” but “fight reform which is unfair”. The social services minister, Scott Morrison, called on business groups to be more vocal in supporting the government’s “very tough savings measures”.
