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Australia extends rate pause as economy rebalances from mining

Tuesday, November 3, 2015 - 11:45
Glenn Stevens.jpg
Reserve Bank of Australia Governor Glenn Stevens and his board kept the cash rate at a record-low 2 per cent Tuesday, as forecast by 17 of 29 economists.

[SYDNEY] Australia's central bank extended its interest-rate pause for a sixth month as evidence mounts that the economy is rebalancing away from mining, supported by past rate cuts and a weaker currency.

Reserve Bank of Australia Governor Glenn Stevens and his board kept the cash rate at a record-low 2 per cent Tuesday, as forecast by 17 of 29 economists. The other 12 predicted a quarter-point cut. The Australian dollar has declined more than 30 per cent in the past three years, boosting the competitiveness of local industries.

"The Australian economy is showing some encouraging signs," Michael Blythe, chief economist at Commonwealth Bank of Australia, said before the decision. "The currency is delivering. It looks like the Fed will help out by lifting US interest rates in December. And new Prime Minister Malcolm Turnbull is making encouraging noises about ramping up infrastructure spending." Policy makers have reduced borrowing costs by 2.75 percentage points since late 2011 to bolster industries outside mining, which is about half way through an unwinding of an investment boom. While housing construction has surged in the low-rate environment, other firms have proved more reluctant to spend, betting they can meet demand from highly indebted households via existing capacity.

That may be changing as credit data released Friday showed lending to businesses rose 1.2 per cent in September from August, the fastest pace since 2008. The RBA maintains that the economy is traveling pretty well given the scale of the drop in mining investment, with the unemployment rate stabilizing at a little over 6 per cent.

The central bank is due to update its forecasts for growth and inflation in its Statement on Monetary Policy released Friday.

While a weaker Aussie helps local producers, some companies are still having to retrench to keep themselves viable. BlueScope Steel Ltd, Australia's largest steelmaker, struck a deal last month to cut 500 jobs and freeze wages for its remaining workers in order to save its plant located south of Sydney.

The economy has also grown at below its average for six of the past seven years.

"The RBA is likely to tolerate below trend growth, as the resources investment cycle declines, as long as there is not a material deterioration in the labor market," Alex Joiner, chief economist for Australia at Bank of America Merrill Lynch, said before the decision. "Our view remains that the RBA has no compelling need at this stage to ease policy further."

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