Central Banks

RBA keeps rates steady, says China housing a concern

RBA leaves interest rates on hold at 2.5%

As expected, the Reserve Bank of Australia (RBA) on Tuesday left its key cash rate at a record low of 2.5 percent, where it's been since August of last year, and suggested rates will stay on hold for a while.

In a statement, the RBA said recent data show moderate growth is occurring; while resource spending is set to fall significantly, investment outside of mining is improving. Overall, the central bank expects economic growth to be below trend in the year ahead.

The Australia dollar dipped 0.3 percent against the dollar on the news, while stock markets showed little reaction.

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"I agree that [with the RBA's] view on where the economy is going. The consumer confidence numbers that we are seeing recently certainly bounced back from concerns, and there is some confidence that service-related investments are coming into play," said Tony Farnham, economist & analyst at Patersons Securities.

The RBA said the most prudent course is likely to be a period of stability for rates. But of interest is its statement surrounding the China's property market – the central bank said the weakening Chinese housing sector will be challenging for the economy in the near term.

"It goes with concerns about where China's GDP (gross domestic product) is going. We've seen a lot of relaxation in authorities [where] they'll throw stimulus at the problem but to do that, you have to consider the asset bubbles that have formed and then solve it. And that is occurring in China's property market at the moment," said Farnham.

China is Australia's biggest trade partner and the outlook for China's growth typically has implications for the economy down under.

Lisa Maree Williams | Bloomberg | Getty Images

Australia is due to release its second quarter GDP growth on Wednesday, which will likely show expansion slowing to 0.4 percent on a quarterly basis, compared with a 1.1 percent growth in the first quarter. The growth pace is expected to slow to 3 percent on an annual basis, versus 3.5 percent in the first quarter.

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On the Australian dollar, the central bank maintained that the currency remains above estimates of its fundamental value. The RBA has spent the past year talking down the Australian dollar as a strong currency could erode competitiveness in an economy undergoing rebalancing away from its once-booming resource sector.

"I'm sure the governor will still try to put a top on the currency every now and then but I think the biggest concern at this stage is interest rate differential that we have relative to other countries which is quite high," said Farnham. "We act as an enticement in investment homes for a lot of those funds looking for return and we will get a further reinforcement of the view from the ECB."

The Australian dollar has had a decent run so far this year, rising 4 percent against the U.S. dollar, and scaling 15-month highs against the Japanese yen.

Analysts say the RBA rhetoric means rates will stay where they are for the foreseeable future.

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"All communication to date has clearly stated that until the 'period of stability in interest rates' is dropped from the statement, rates are on hold. Communication has also stated that once this is dropped, rates are likely to rise; however this is likely to be several months after the fact," said Evan Lucas at IG.

"In short, Australian interest rates are going to remain on hold until at least March next year," he added.

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