Australia rates held at 2.25% for 2nd month, potential for further cutbacks
Australia’s central bank Tuesday left interest rates on hold at 2.25 percent for the second successive month, but kept the door open for further cuts as the economy continues to struggle.
The Reserve Bank of Australia (RBA) said after its monthly board meeting that it was “appropriate to hold interest rates steady for the time being.”
In February the bank slashed its official cash rate by 25 basis points to a record-low of 2.25 percent — its first reduction in 18 months.
“Further easing of policy may be appropriate over the period ahead, in order to foster sustainable growth in demand and inflation consistent with the target,” the RBA said in a statement.
The Australian dollar strengthened by almost 1 U.S. cent to trade at 77.11 U.S. cents. The “Aussie” has taken a hit in recent months as commodity prices plunge while investors have been betting on the U.S. Federal Reserve to hike interest rates, which boosts the U.S. dollar.
The Australian economy has struggled as it exits an unprecedented mining investment boom that helped it avoid recession for more than two decades.
With inflation low, the economy expanding at a below-trend pace and the unemployment rate at multi-year highs, the central bank cut the cash rate in February to spur growth.
The bank’s decision to hold off another cut surprised markets and the benchmark S&P/ASX200 index pared most of its morning gains and failed to end above the psychological 6,000-point mark.
But a majority of economists had forecast the central bank to remain on the sidelines to see whether the last easing was a sufficient boost to the economy. Most expected a cut in May instead.
Further Cut Likely
“They’ve still maintained their easing bias,” JP Morgan senior economist Ben Jarman told AFP.
“For a board that took a long time to get over the line to cut again in February, they obviously want to give the last rate cut some time to breathe life into the economy.
“They are sitting back and looking for signs of that occurring.”
While economists fear the low rates could overheat the housing market, the RBA said it was cautiously optimistic about it, noting that although prices were still rising sharply in Sydney, trends were varied across other cities.
The RBA added that the Australian dollar — which it has long said needed to decline more to boost growth in non- mining sectors — was likely to depreciate further as commodity prices weaken.
The bank cautioned that overall domestic demand was “quite weak.” while economic data was pointing to soft growth.