Australia's central bank holds rates, Ukraine a new uncertainty - Financespiders

Australia's central bank holds rates, Ukraine a new uncertainty - Financespiders

Australia's central bank on Tuesday kept interest rates at a record low and cited the war in Ukraine as a major new source of uncertainty as it stressed patience on tightening policy.

Wrapping up its March policy meeting, the Reserve Bank of Australia (RBA) held rates at 0.1% and reiterated it was prepared to wait for a long-desired pick up in wages growth before acting to tighten policy.

"The Board is prepared to be patient as it monitors how the various factors affecting inflation in Australia evolve," said RBA Governor Philip Lowe in a brief statement. "The war in Ukraine is a major new source of uncertainty."

Lowe sounded upbeat on the domestic economy, noting strength in consumer spending, business investment, and the labor market.

Figures for fourth-quarter GDP due on Wednesday are expected to show a rapid rebound in growth of at least 3% as household demand surged back from coronavirus lockdowns. read more

That recovery shows every sign of continuing with retail sales jumping in January and banks reporting healthy spending on their cards through February.

Unemployment has dropped to a 13-year low of 4.2% and looks likely to fall under 4% for the first time since the 1970s. Lowe recently said it was plausible a first-rate rise could come later this year if the economy continues to recover, while markets are pricing in a move as early as July.

The Russian invasion of Ukraine has added geopolitical uncertainty to that mix and combined with massive floods in New South Wales and Queensland states to darken the public mood.

An ANZ survey of consumers out on Tuesday showed a sharp drop in sentiment last week, while inflation expectations ran at a seven-year high of 5.3% as petrol prices hit record peaks.

The heat also seems to be coming out of the housing market with prices in Sydney falling in February for the first time in 17 months, though the shift to the country continues apace.

Figures from property consultant CoreLogic showed national home prices rose 0.6% in February, almost half the 1.1% jump seen in January. Values in Sydney dipped 0.1% and Melbourne went flat, hurt by a rush of supply and higher mortgage rates. read more

"Price gains in 2021 nationally were extraordinary and a correction lower is a natural response," said Gareth Aird, head of Australian economics at CBA. "This cycle looks to have run its course in Sydney and Melbourne."

He also expects the RBA will start raising rates in June should inflation for the first quarter be as high as feared, which will further pressure the market.

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"We estimate there are over one million home borrowers who have never experienced an increase in mortgage rates," added Aird. "This means that we expect a gradual and a shallow rate hike trajectory." As a result, he now expects capital city prices to be flat this year, compared with a previous forecast of a 7% gain, and to fall by 8% in 2023. Source: Reuters.

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