Analysis: Rates on hold as Australian economy enjoys steady growth

In its first board meeting this year, the Australian Reserve Bank (RBA) has decided to keep interest rates on hold as Australia's sunny economic conditions continued to surprise analysts.

Australian house prices were much stronger than expected in the fourth quarter with broad-based growth shown across the lion's share of Australia's residential housing markets.

Most local experts agreed that the RBA needed to hold the cash rate with markets pricing in just a 16 percent chance of a rate cut today.

The official interest rate remains at 3 percent, after the RBA reduced the cash rate to the historic low in December.

The rebound of the Chinese economy, a mainstay for Australian exports, especially the commodities markets, has come at crucial time for the Australian economy.

In a statement, RBA Governor Glenn Stevens said international conditions were turning a corner. "Global growth is forecast to be a little below average for a time, but the downside risks appear to have abated, for the moment at least," Stevens said in statement.

Stevens said that the United States has so far avoided a severe fiscal contraction and financial strains in Europe have lessened considerably over recent months. "Growth in China has also stabilized at a fairly robust pace. Around Asia generally, growth was dampened by the earlier slowing in China and the weakness in Europe, but again there are signs recently of stabilization. Some commodity prices have firmed up during the recent months," Stevens said.

The decision comes as some positive signs returned to the real estate market with buyer inquiries up and auction clearance rates stronger in the final quarter of 2012, according to Domain, Australia's key property classifieds.

Domain's Carolyn Boyd told Xinhua that the lucrative Australian property market was on the uptrend. "There has been a general lift on confidence in the property market," she said.

The RBA began relaxing monetary policy in November 2011, slashing rates by 1.75 percent over six moves.

The dollar slipped nearly half a cent on the decision to the day's low of 1.0398 U.S. dollars as the accompanying statement by Governor Stevens was considered fairly dovish indicating the next move by the bank could be another cut.

JP Morgan analyst Tom Kennedy said in a note the house price index was surprisingly strong. "The preliminary estimate for the ABS house price index was much stronger than we had expected, with prices in the eight major capital cities increasing by an impressive 1.6 percent year on year," Kennedy said.

Kennedy said the figures were led by a welcome boost from a 2.3 percent surge in Sydney house prices, the largest quarterly increase for this market since 2009, when prices staged a solid recovery following a prolonged period of weakness during the height of the financial crisis.

Meanwhile, figures released by the Australian Bureau of Statistics (ABS) show the decline in imports has been met with a burgeoning commodity prices narrowing Australia's trade deficit to 427 million Australian dollars in December, seasonally adjusted.

Compared with an upwardly-revised deficit of 2.788 billion Australian dollars in November, the figures, released on Tuesday, showed exports rose 3.0 per cent, while imports fell 6.0 per cent.

Alvin Pontoh, Asia-Pacific Macro Strategist, FX and Rates Strategy, TD Securities said the turnaround was impressive.

"The trade deficit shrunk to 427 million Australian dollars in December, not quite the balanced position we were expecting, but much better than consensus expectation for a 800-million- Australian-dollar deficit. This is a massive turnaround from November's revised a 2.8-billion-Australian-dollar deficit, the worst since February 2008," Pontoh said.

In December Australia's exports rose 2.6 percent, while imports fell a sharp 6.2 percent, with the key metal ores & minerals surging 11.9 percent and coal rising 4.7 percent. (One U. S. dollar equals 0.96 Australian dollar) Enditem