Reserve Bank keeps interest rates on hold as home building soars

04 Mar 2014 -

 THE Reserve Bank of Australia kept interest rates on hold today, left with little choice given both rising inflation and unemployment, while a sharp rise in new home building raises the prospect of rises later in the year.

The bank’s nine-member board decided to leave the official cash rate at 2.5 per cent for the seventh month after sending a strong signal last month it wanted a “period” of interest rate stability.

The Australian dollar fell by a quarter of a US cent after decision.

At 2:35pm (AEDT), the currency was worth US89.21c, down from US89.46c shortly before the RBA’s decision was announced.

The currency ended yesterday’s local session at US89.24c.

The ABS said earlier today the number of houses and apartments approved by councils for construction had jumped 6.8 per cent to 17,500 between December and January, extending the trend of rising interest in home building following strong growth in capital city house prices.

“The flow of approvals is now tracking close to that seen in early 2010 when activity in the property market was underpinned by generous government grants and subsidy programs,” Tom Kennedy, an economist at JP Morgan, said, referring to programs since wound back by state and federal governments.

“It is clear that activity in the building sector is trending higher, with this momentum to persist in 2014,” he said, noting the particular strong bounce in Victoria and NSW.

The rate of home building in January was more than 34 per cent higher than a year ago, foreshadowing less upward pressure on house prices as more supply emerges.

Meeting amid mounting fears war could break out between the Ukraine and Russia, the Reserve Bank’s board said rising local house prices, the strong pick-up in home building, and improved corporate profitability and confidence were evidence its policy of sustained low interest rates was working.

On an annualised basis the rate of inflation jumped above the bank’s target band of 2 to 3 per cent at the end of last year, appearing to rule out any further interest rate cuts, while the unemployment rate rose to a decade high of 6 per cent in January.

The gold price surged 2 per cent overnight following heightened global uncertainty about the Crimean peninsula and US bond yields fell as money poured back into safe-haven US assets.

Financial markets expect no change in interest rates this calendar year but most expected rates to increase early next year as the economy starts to recover.

With AAP