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[SYDNEY] Australia left its key interest rate unchanged as a weaker currency relieves competitive pressure on companies and the central bank awaits the impact of two rate cuts in the first half of the year.
Central bank Governor Glenn Stevens and his board left the cash rate at a record-low 2 per cent in Sydney on Tuesday, as predicted by markets and economists. They're relying on an extension of the Australian dollar's 3.3 per cent drop in May as anticipation mounts the Federal Reserve will raise US rates.
Australia has so far had little success in stimulating industries as a decade-long mining investment boom winds down. Businesses plan to cut investment in the next 12 months by the most on record as firms decide they can meet demand with existing capacity amid weak wage growth.
"The currency will depreciate over the next nine months as the Australian economy faces the headwinds from a mining investment downturn," Commonwealth Bank of Australia Chief Economist Michael Blythe said ahead of the decision. "The Reserve Bank of Australia will remain on an easing bias during this period and the risk remains another interest-rate cut." Traders are pricing in one more rate cut in the next 12 months as the nation, an engine room of the decade-long global commodity boom, forecasts a 90 per cent plunge in spending on mining projects, calling time on its biggest resources bonanza since the 1850s gold rush.
The nation's economic growth probably cooled to 2 per cent in the first quarter from a year earlier, the slowest pace since 2013, economists predicted ahead of data tomorrow. Yet the labor market has remained relatively resilient, aided by weaker wages, with unemployment hovering around 6.2 per cent.
Cheap borrowing costs have also boosted the property market: prices in Sydney rose 15 per cent in May from a year earlier and Australia's major banks have said they will curb growth in home loans to investors. Australia's most-senior economic bureaucrat this week issued one of the strongest warnings yet by a government official.
"When you look at the housing price bubble evidence, it's unequivocally the case in Sydney - unequivocally," Treasury Secretary John Fraser said in testimony before a parliamentary committee in Canberra on Monday. "Frankly, whatever the data says, just casual observation would tell you that's the case."