Australia’s central bank will reduce its benchmark interest rate to the lowest in the body’s 53-year history, according to credit markets that more accurately picked yesterday’s cut than economists.
Traders are pricing in an 80 percent chance the overnight cash-rate target will be 2.75 percent or less by Feb. 5, swaps data compiled by Bloomberg show. Governor Glenn Stevens and his board lowered the rate 0.25 percentage point to 3.25 percent yesterday, a decision predicted by nine of 28 analysts surveyed by Bloomberg News. Australia’s record-low benchmark was the 2.89 percent set in January 1960, RBA figures show.
Stevens said Australia’s record mining boom will peak at a lower level than expected, as he joined peers from Europe to the U.S. seeking to boost growth. That marked a reversal from June, when he said “cheerleading” was needed to rebut pessimists. The nation’s benchmark yields are 2.93 percent, almost double the average for top-rated peers, and Australia’s dollar gained 7.3 percent over the past year even as prices plunged 39 percent for iron ore, the nation’s biggest export.
“This was the first time the RBA has acknowledged the need to provide stimulus as the mining investment boom begins to fade,” said Adam Donaldson, head of debt research in Sydney at Commonwealth Bank of Australia, the nation’s largest lender. “We’ll end up seeing multiple rate cuts that may take the benchmark to about 2.5 percent in the next year or so.”
Glass Half Full?
Stevens, in a June 8 speech titled “The Glass Half Full” expressed optimism about the nation’s economy and cautioned against monetary policy settings that could reignite asset bubbles. Responding to audience questions, Stevens said he felt the need to do some “cheerleading” for the economy in response to negative commentary on the nation’s prospects and weak consumer and business confidence.
Since then tumbling commodity prices have spurred miners including BHP Billiton Ltd., Xstrata Plc and Fortescue Metals Group Ltd. to delay some of the projects in a resources development pipeline the Australian government estimated in June at A$500 billion ($511 billion). At the same time, companies from Bluescope Steel Ltd. to surfwear maker Billabong International Ltd. and the local unit of Ford Motor Co. have been struggling to cope with the local dollar’s strength.
Stevens will probably cut interest rates again next month, according to economists surveyed by Bloomberg after yesterday’s reduction, in what would be his seventh-straight move on the day of the Melbourne Cup, Australia’s richest horse race.
The RBA will lower the overnight cash rate target by a quarter percentage point to 3 percent on Nov. 6, according to 12 of 21 economists polled, unwinding all of the 1.75 percentage points of increases Stevens made in the wake of the 2009 global financial crisis. The remainder expected no change. The median expectation is that the rate will stay at that level, matching the lowest benchmark since 1960.
Swaps are estimating a 75 percent chance of a rate cut for next month, and see a 65 percent chance Stevens will cut the benchmark to 2.5 percent or lower by March. The contracts accurately predicted yesterday’s move, pricing in a 77 percent chance of a reduction.
The extra yield 10-year Australian government bonds offer over similar-dated Treasuries shrank today to a three-month low of 132 basis points as investors downgraded prospects for the developed world’s fastest-growing economy. Prices for Australia’s commodity exports plunged 19 percent over the year ending Sept. 30 in local-dollar terms, according to an RBA index published yesterday.
The rate on Australian 10-year notes has dropped 142 basis points since reaching its 2012 peak of 4.35 percent on March 20, as Europe headed toward recession and output slowed in China, the South Pacific nation’s biggest export market. The Aussie dollar, the world’s fifth-most traded currency, came within 2 U.S. cents of falling below parity last month as prices for iron ore, the nation’s biggest overseas shipment, dropped to the lowest since 2009.
The Australian currency was at $1.0223 at 12:51 p.m. in Sydney, after earlier touching an almost one-month low of $1.0221. It was still more than 35 percent above its average level since exchange-rate controls were scrapped in 1983.
Over the past month, government data indicated a weaker economy: growth slowed in the second quarter to 0.6 percent from 1.4 percent in the first three months of the year; employers unexpectedly cut payrolls in August; the nation recorded a wider-than-expected trade deficit in August; and business confidence declined.
Australia recorded a A$2.03 billion trade shortfall, the widest since March 2008, as coal exports dropped, the statistics bureau said today in Sydney. The median estimate in a Bloomberg News survey of 22 economists was for a A$685 million gap.
BHP Billiton said last month it will stop production at a coking coal mine in Queensland state after delaying a $33 billion copper-uranium-gold project in South Australia in August.
Adding to concern that demand for exports will slow is weakening economic data in China, its biggest trading partner. A quarter of Australia’s exports, making up about 5 percent of gross domestic product, goes to China, and 60 percent of those shipments are iron ore. Manufacturing in the Asian nation contracted for a second consecutive month for the first time since 2009, a government survey indicated Oct. 1.
“The peak in resource investment is likely to occur next year,” Stevens said in a statement yesterday. “As this peak approaches it will be important that the forecast strengthening in some other components of demand starts to occur.”
The Markit iTraxx Australia index of credit-default swaps that gauges perceptions of corporate bond risk was little changed at 157.44 basis points today in Sydney, according to Markit Group Ltd.
The extra yield investors demand to hold company notes instead of Australian government bonds was at 202 yesterday, Bank of America Merrill Lynch indexes show. It touched 192 on Sept. 24, the lowest level in more than a year, according to the data.
Australia’s 10-year yield still offers 140 basis points more than the average benchmark sovereign yield for its top-rated peers. The country is one of 11 sovereign markets worldwide that hold the top grades from all three of the main credit-rating companies.
“The global backdrop, the fact that inflation is low and the exchange rate is higher has allowed them to make policy a little more accommodative,” Peter Jolly, Sydney-based head of market research for National Australia Bank Ltd., said in reference to the RBA. “I don’t think we’re starting a big series of rate cuts. The economy is nowhere weak enough to justify that,” said Jolly, who predicts the cash rate will be at 3 percent by early next year.
Growth in Australia will probably be at a 3.6 percent pace this year, according to the median estimate in a Bloomberg News survey of economists. The rate of expansion in the U.S., where the Fed committed last month to unprecedented bond purchases, will be 2.2 percent, a separate poll showed.
Even after yesterday’s reduction, Australia’s central bank has the most monetary firepower left among major developed economies. Benchmark rates are near zero in the U.S. and Japan, 0.5 percent in the U.K., 0.75 percent in the euro area, 1 percent in Canada and 2.5 percent in New Zealand.
Hideo Shimomura, who helps oversee the equivalent of $77.3 billion in Tokyo at Mitsubishi UFJ Asset Management Co., estimates the RBA rate will be at 3 percent by Dec. 31 and 2 percent in a year.
“They said inflation is in their target band, the currency is still too high and the situation in China is weaker,” Shimomura said. “The conclusion is that there may be another rate cut in coming months.”