Australia central bank cuts rates to record low even as home prices stage a comeback

SYDNEY (Reuters) – Australia’s central bank cut interest rates for the third time this year on Tuesday in a bid to stimulate a sluggish economy and signaled it was prepared to do more if needed.

The country’s economy has expanded for 28 years without a recession, but risks have intensified over the past year, with growth slowing, inflation lukewarm, the property market shaky and unemployment ticking higher.

The Reserve Bank of Australia’s (RBA) quarter-point cut took the cash rate to an all-time low of just 0.75%, and left little room for more reductions.

As the decision was largely in-line with expectations, the local dollar AUD=D3 nudged up from a one-month trough of $0.6733 earlier in the day.

Tuesday’s easing follows two back-to-back cuts in June and July, which have so far done little to boost activity outside of the country’s housing market.

Indeed, figures earlier in the day showed home prices across Australia’s capital cities jumped 1.1% in September, led by Sydney and Melbourne, but approvals to build new homes collapsed to the lowest since 2013.

Economists expect construction-related job losses in coming months which could take the unemployment rate to as high as 5.5% from 5.3% now.

RBA Governor Philip Lowe acknowledged its decision to lower rate was partly to respond to the slack in labor market.

“The Board took the decision to lower interest rates further today to support employment and income growth and to provide greater confidence that inflation will be consistent with the medium-term target,” Lowe said in a short statement accompanying the rate decision.

“The economy still has spare capacity and lower interest rates will help make inroads into that.”

Lowe sees a “gentle turning point” for the economy after annual growth hit a decade low of 1.4% in the quarter-ended June. It is still ready to cut interest rates again if need be.

Financial futures <0#YIB:> are pricing in a fourth cut to 0.5% by early next year.

“The Board will continue to monitor developments, including in the labor market, and is prepared to ease monetary policy further if needed…,” Lowe said.

Record low interest rates have boosted home prices, helping end two years of continuous declines which ate into household wealth and confidence in a blow to consumption and the broader economy.

Some economists believe the price revival could prove a blessing for the construction sector which has seen a severe downturn in new home approvals, particularly for the once red-hot apartment sector.

However, building approvals fell 1.1% in August, less than a sharp 10% slide in July but confounding market expectations for a bounce of 2.5%, data from the Australian Bureau of Statistics (ABS) showed.

One positive sign in the data was a small bounce in approvals to build new apartments while non-residential construction surged 54%.

“The recovery in non-residential construction over recent months should go some way to countering the weakness in residential,” economists at ANZ wrote in a note.

“Lower interest rates should eventually filter through to a pick-up in housing approvals.”

Reporting by Swati Pandey; Editing by Shri Navaratnam & Kim CoghillOur Standards:The Thomson Reuters Trust Principles.

Leave a Reply

Your email address will not be published. Required fields are marked *