RBA Holds Rate at Record-Low 2.5% as Mining Slowdown Dents Jobs
By: Michael Heath
Australia’s central bank left its benchmark interest rate unchanged at a record low to spur domestic industries and offset a slump in mining investment. Governor Glenn Stevens and his board kept the overnight cash-rate target at 2.5 percent, the Reserve Bank of Australia(RBA) said in a statement today in Sydney. The decision was predicted by all 32 economists surveyed by Bloomberg News and markets had priced in almost no chance of a move.
After 2.25 percentage points of rate cuts from late 2011 through August, the RBA has held the benchmark rate steady as home prices advanced, inflation accelerated and a drop in the currency eased pressure on exporters. Markets and economists predict Stevens will leave rates unchanged at a record-low this year to avoid a growth gap as mining companies plan fewer projects amid slowing Chinese growth, weakening the job market.
It’s “difficult to make the case for the start of policy normalization this year,” said Su-Lin Ong, head of Australian economic and fixed-income strategy at Royal Bank of Canada in Sydney. “The labor market remains weak” and “still elevated levels of household debt hint at lower potential growth.” Australia has only had two calendar years without a rate move -- in 2004 and 1995 -- since the last recession in 1991.The debt to disposable income stood at 147.9 percent as of Sept. 30, according to central bank data.
The nation’s unemployment rate jumped to 6 percent in January, the highest level since July 2003, and about 50,000 jobs in the auto and parts industry are in jeopardy after Toyota Motor Corp. last month followed General Motors Co. and Ford Motor Co. in announcing plans to quit manufacturing in the country. Alcoa Inc. announced last month the closure of an aluminum smelter and two mills with the loss of 980 jobs. Australian business investment fell in the fourth quarter by the most since 2009, government data showed last week. Companies projected A$124.9 billion ($111.5 billion) of spending in 2014-15, down from an estimated A$167.1 billion this fiscal year, led by a drop in mining investment.
Meanwhile in China, Australia’s biggest trading partner, a gauge of manufacturing fell in February to an eight-month low, while a private index yesterday from HSBC Holdings Plc and Markit Economics indicated a contraction worsened last month. The RBA is trying to stimulate housing construction to pick up slack in the labor market from waning mining investment. A private RP Data-Rismark home value index released this week showed house and apartment prices rose 14.1 percent in Sydney in the year to Feb. 28. Approvals to build new dwellings jumped 6.8 percent in January from a month earlier, data today showed.
Even with the record low cash rate, Australia’s household savings ratio has held above 10 percent for the past three years as consumers concerned about job security hunker down. That will need to be run down to spur consumption, with the latest data scheduled to be released tomorrow in the fourth quarter-gross domestic product report.