Members “noted the significant uncertainties around the growth forecast and the importance of considering the risks to the forecast as well as the central projection,” the Reserve Bank of Australia said in minutes released today of its Aug. 5 meeting, where it kept the cash rate unchanged at a record-low 2.5 percent. “GDP growth was likely to have slowed to a more moderate pace in the June quarter.”
Governor Glenn Stevens, seeking to stoke domestic demand to compensate for a slowdown in mining investment, has seen his efforts hampered by an elevated currency. Market pricing shows a higher chance of further policy easing after the nation’s unemployment rate jumped to a 12-year high in July, the RBA cut its growth and inflation forecasts and wage growth stagnated.
“There’s an increased backdrop of uncertainty,” said Tom Kennedy, a Sydney-based economist at JPMorgan Chase & Co. “Growth is perhaps a little bit weaker than expected three or four quarters ago and uncertainty about the outlook still remains, and this is going to feed into whether they have to provide more stimulus to the economy.”
The central bank noted the local currency remained “well above” its level in late January even as commodity prices have weakened and rate differentials between Australia and most other advanced economies have narrowed since then. The Australian dollar -- which traded as high as about $1.11 and as low as 80 U.S. cents in the past five years -- has remained above 90 cents since March. It traded at 93.38 U.S. cents at 12:19 p.m. in Sydney from 93.25 before the release of the minutes.
“Average lending rates on housing and business loans in Australia continued to edge down over July, mainly owing to the ongoing replacement of more expensive fixed-rate and discount variable-rate loans,” the RBA said today. “Overall, cumulative movements in interest rates since the start of the year amounted to a noticeable easing in financial conditions.”
Traders were pricing 10 basis points of cuts to the benchmark cash rate over the next 12 months, an index of swaps from Credit Suisse Group AG showed prior to the minutes.
“The most prudent course was likely to be a period of stability in interest rates,” the RBA reiterated today.
Unemployment rose to 6.4 percent in July from 6 percent in June, the statistics bureau said in Sydney Aug. 7, two days after the policy meeting. Australia’s jobless rate is now higher than the U.S. level for the first time since 2007.
“A notable degree of spare capacity in the labor market was suggested by the relatively high unemployment rate and the participation rate being close to its lowest rate in almost a decade,” the RBA said in the minutes.
Loose monetary policy has boosted the property market. Home prices rose 1.8 percent in the second quarter from three months prior and 10.1 percent from a year earlier, according to government data released last week.
“Conditions in the established housing market also remained strong and while house price inflation across the country in 2014 had not been as rapid as over the second half of 2013, it had remained robust,” the RBA said today.
Private reports last week also showed business and consumer confidence improved to the highest since the budget and September election respectively.
“The many moving parts in the economy are sending conflicting messages,” said Katrina Ell, an economist at Moody’s Analytics in Sydney. “The high exchange rate is a hindrance on rebalancing away from mining investment. This uncertain outlook is keeping the central bank on the sidelines.”
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