By Wayne Cole
SYDNEY (Reuters) - Australia's central bank held rates at a record low of 2.5 percent for a third month on Tuesday saying past cuts were supporting demand, but cautioned that a full recovery might not be possible without a weaker currency.
The Reserve Bank of Australia's latest protest about currency strength was enough to knock the Australian dollar down a quarter of a U.S. cent, though it would certainly favour a much larger fall to truly revive the economy.
"The Australian dollar, while below its level earlier in the year, is still uncomfortably high," RBA Governor Glenn Stevens said in a brief statement following the bank's monthly policy meeting. "A lower level of the exchange rate is likely to be needed to achieve balanced growth in the economy."
Activity in the world's 12th-largest economy has started to stabilise in recent months with rising asset prices, consumer spending and confidence removing the urgency for more stimulus.
A Reuters poll of 23 analysts had found all expected rates to stay steady this month and a majority saw no more easing, which would end a cycle of cuts that began in November 2011 when rates were at 4.75 percent.
Financial markets have also pared back expectations of a move with interbank futures putting the probability of further easing at no more than one-in-three.
Yet the stubborn strength of the local currency could prove the one factor that forces a compensating cut in rates since the market has not been cooperating with the RBA.
Despite its dip on Tuesday, the dollar's level of $0.9475 is up from $0.8950 when the RBA cut rates in August.
Just last week Stevens stepped up the rhetoric on the currency, warning investors it was likely to be "materially lower" in the future due to Australia's falling terms of trade.
WAITING ON THE FED
Still, Stevens has also conceded there is little the RBA can do directly to influence currency markets. Instead he has expressed hope the U.S. Federal Reserve will get on with tapering its massive stimulus program, which would likely give a boost to the U.S. dollar against the Aussie.
"The message is loud and clear, any further easing in monetary conditions they want to come from the currency, and there I think we're hostage to the Fed," said Michael Blythe, chief economist at Commonwealth Bank.
The RBA has another opportunity to address currencies in its quarterly statement on monetary policy due on Friday, a 60-odd page assessment of the local and global outlook.
Australia's A$1.5 trillion-a-year economy is in its 23rd year of uninterrupted expansion, yet the latest growth pulse of 2.6 percent is short of the 3.25-3.5 percent pace that economists consider "normal".
There is growing evidence that low rates are finally oiling the wheels of economic activity. Home prices have taken off in the major cities with gains of almost 8 percent in the year to October, according to property consultant RP Data-Rismark.
That in turn is encouraging more construction. Approvals to build new homes surged 14 percent in September to their highest in more than three years.
A revival in home construction would be welcome as a long boom in mining investment is cooling and it is not yet clear whether other businesses will ramp up their spending.
Higher home prices combined with a sustained rally in equities have in turn helped repair household balance sheets and lift sentiment. The RBA estimates that the net worth of Australians has increased by around 15 percent, or more than A$800 billion, since the end of 2011.
Consumers are also spending more. Retail sales jumped 0.8 percent in September, twice what analysts expected and the biggest gain in seven months.
Adjusting for inflation, sales were up 0.7 percent in the three months to September, again topping forecasts and making a useful contribution to economic growth in the quarter.
(Reporting by Wayne Cole; Editing by Chris Gallagher)