Reserve Bank of Australia rate cut possible: survey

Philip Lowe’s Reserve Bank of Australia has a dilemma ahead. On Tuesday, the central bank held its benchmark policy rate at a record low of 1.5 percent once again. But the inaction masks a pointy debate about what happens next. Weak inflation argues for even lower interest rates, while a bubbly housing market cries out for tighter policy.

RBA-watchers are split on where the bank goes next.

Despite the governor signalling the current level is a floor, nearly a fifth of analysts polled by Reuters think Lowe’s institution could cut by the end of the year, while a smaller minority have pencilled in hikes. They are backed up by futures prices quoted by the Australian Securities Exchange that imply rates rising 25 basis points by June of next year.

Doves have a point. Excluding volatile price changes, underlying inflation is also plumbing record lows, at 1.5 percent. And prices are unlikely to start rising much faster, even if the outside world is entering a reflationary phase. UBS economists reckon prices Down Under will only be rising 2.1 percent annually by the end of next year, with sluggish growth in rent and wages both partly to blame. Low-cost foreign outfits such as Aldi and H&M are also keeping high-street prices down for consumers.

At the same time, ultra-loose monetary policy is encouraging a debt-fuelled boom. Household borrowing has risen sharply and property prices have soared, with an extra boost from Chinese buyers. Sydney is now the world’s second-least affordable housing market, according to Demographia. While other, “macro-prudential” measures can help rein in mortgage lending, increasing the cost of borrowing is an obvious lever to pull.

For now, Lowe and his gang are staring at the problem. They have at least one welcome tailwind: a more aggressive U.S. Federal Reserve, which is likely to start a new cycle of rate rises next week. That should help sink the Aussie dollar from its current $0.76, delivering an economic boost without some of the nastier side effects of even lower interest rates. The local currency has already fallen from parity to the U.S. dollar in 2013, but a further drop would aid the country’s pivot away from natural resources, by helping non-mining businesses export more. Australia’s debt lovers are off the hook for now.

By Quentin Webb

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

CONTEXT NEWS
– The Reserve Bank of Australia held its benchmark policy rate unchanged at a record low of 1.5 percent on March 7.
– RBA Governor Philip Lowe said most measures of business and consumer confidence were at average or above-average levels, but the labour market was mixed and underlying inflation was “likely to stay low for some time”.

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(Editing by Una Galani and Nicolle Liu)