RBA keeps interest rate cut in reserve
The Reserve Bank is keeping a close watch on the housing market, as it signalled a willingness to sit on the sidelines while previous interest rate cuts continue to stimulate the economy.
The central bank did not rule out the possibility of another rate cut in its November board meeting minutes, released on Tuesday, noting there was uncertainty over the growth in non-mining business investment over the next year.
Economists said the RBA's continued easing bias was also driven by the need for a lower Australian dollar, which it again pointed out was "uncomfortably high".
The RBA said "there was mounting evidence that monetary policy was supporting activity in interest-sensitive sectors and asset values".
"[Given] the lags with which monetary policy operates, the stimulatory effects would likely continue coming through for some time," the RBA said.
"It was appropriate to leave the cash rate unchanged while continuing to gauge the effects, including in the housing market, of the substantial degree of monetary policy stimulus that had been put in place over the past two years."
The RBA faces a delicate balancing act when it weighs up its cash rate decisions. While it prefers a lower exchange rate, further monetary policy easing to reduce the impact of a high dollar on export-oriented industries could also overheat the booming housing market.
"The stimulation [of the economy] needs to come from a lower currency," said Michael Workman, senior economist at the Commonwealth Bank. "You always have this problem in Australia where so much lending is done at the short end. Variable rate loans are the norm. So, if you keep cutting interest rates, you tend to overstimulate the housing market."
Attention is set to turn to RBA governor Glenn Stevens, who will speak about the history of the Australian dollar as a floating currency on Thursday night. His speech comes amid several weeks of jawboning by central bank officials.
The RBA is dependent on a start to the US Federal Reserve's plans to reduce its bond-buying program, which could lead to a weaker Australian dollar against the US currency.
"The RBA itself has discussed the fact that the Australian dollar is at these levels because of monetary policy being applied by other countries," National Australian Bank currency strategist Emma Lawson said. "So I expect that they will continue to jawbone and they will get even more vociferous if the Australian dollar doesn't weaken."
With the odds of a rate cut in December remaining low, economists said the RBA was likely to monitor spending figures during the Christmas season to get a sense of a possible pick-up in consumer demand when it returns for its next board meeting in February.
"Given that they don't think that non-mining business investment's going to pick up any time soon, they really need to see some signs of a pick-up in consumer spending over the next three months or so," Citi chief economist Paul Brennan said. "If they don't, that might mean that they could consider cutting again."
The RBA repeated its expectations of below-trend growth next year in the minutes. In the quarterly Statement on Monetary Policy released two weeks ago, the central bank downgraded its 2014 and 2015 growth forecasts amid a faster than expected fallout in mining investment.
The RBA added in the November minutes that it was not yet clear when non-mining business investment would fill the gap.
"It appeared likely that growth of the economy over the coming year would be below trend but that growth could reasonably be expected to pick up thereafter," the minutes said.