RBA Considered More Easing May Be Appropriate: Minutes

RBA Governor Glenn Stevens
Glenn Stevens, governor of the Reserve Bank of Australia. Photographer: Patrick Hamilton/Bloomberg

The Reserve Bank of Australia said more interest-rate reductions may be appropriate to spur economic growth as a mining boom wanes, minutes of its Nov. 6 policy meeting showed, sending the nation’s currency lower.

“Members considered that further easing may be appropriate in the period ahead,” according to the minutes released today in Sydney. “While a gradual recovery in both dwelling and other business investment was anticipated, assisted in part by the lower level of interest rates, there was also uncertainty about the timing and magnitude of this pick-up.”

At the meeting, the central bank held the overnight cash-rate target, citing a better global outlook and faster domestic inflation, after five cuts in the prior year to help extend a 21-year run without a recession. RBA Governor Glenn Stevens lowered the benchmark by 1.5 percentage points to 3.25 percent from November 2011 to October this year as the bank aims to help industries including construction rebound to offset a slower pace of resource investment.

“The decision to keep rates on hold earlier this month seems to be more finely balanced than previously thought,” said Savanth Sebastian, an economist in Sydney at a unit of Commonwealth Bank of Australia. “While the likelihood of a further rate cut has increased in a broader sense, the Reserve Bank is still in a holding pattern.”

Currency Reaction

The so-called Aussie dollar fell 0.1 percent to $1.0408 as of 12:14 p.m. in Sydney, from yesterday in New York, after earlier reaching $1.0425, the strongest since Nov. 14.

“There were tentative indications that housing activity may be reaching a turning point,” policy makers said in the minutes. “The effects of the earlier reductions in the cash rate were, meanwhile, continuing to work their way through the economy, and members expected that further effects of these changes were yet to be observed.”

The RBA, in a Nov. 9 statement, reduced its 2013 growth forecast as lower investment in iron-ore, coal and natural-gas projects and the government’s pledge to deliver an election-year budget surplus restrain the economy.

“Members noted that the spot price for iron ore had recently increased in line with a rise in steel production and prices, but remained well below levels seen earlier in the year,” the minutes showed. “In contrast, spot prices for both thermal and coking coal had declined further.”

China Link

A quarter of Australia’s exports, or about 5 percent of gross domestic product, goes to China and 60 percent of those shipments are iron ore.

“There were signs that the pace of growth in China may have stabilized,” according to the minutes. “For the global economy, data received over the previous month had been somewhat more positive.”

In the new forecasts, consumer prices were projected to rise 2 percent to 3 percent in the year to December 2013 and underlying inflation the same rate, little changed from three months ago, the central bank said. The central bank targets underlying inflation in a 2 percent to 3 percent range.

Recent indicators suggest “that economic growth was more moderate in the September quarter,” the minutes showed, with the economy expanding “around trend pace” in recent months, compared with above-trend growth earlier in the year. “Leading indicators of labor demand had softened a bit further, suggesting modest near-term employment growth was likely.”

Higher Unemployment

Australia’s unemployment rate rose to a 2 1/2-year high of 5.4 percent in September and held at that level in October. Monthly employment growth this year has averaged 10,900 jobs, less than the average of 17,200 a month in the prior five years, according to government data compiled by Bloomberg.

The local currency is little changed this month as a better outlook for China, Australia’s key trading partner, offsets concern about the U.S. political stalemate over budget cuts and tax increases. The Aussie has averaged about $1.03 in the past two years, compared with 73 U.S. cents in the prior decade.

In today’s minutes, the RBA said the currency “remained at a high level” and noted that the increase of some prices of internationally traded goods “suggested that the downward pressure on tradables prices from the earlier appreciation of the exchange rate was waning.”

Projects Put Off

Australia’s economy grew about 4 percent in the first half of 2012 from a year earlier on the strength of resource-industry investment and consumer spending. Weaker commodity prices and the elevated currency prompted mining companies including BHP Billiton Ltd. and Fortescue Metals Group Ltd. to put off projects and cut jobs in recent months.

“Conditions in the mining sector had declined since earlier in the year,” policy makers said in the minutes, attributing the less optimistic assessment to lower commodity prices. “Exports were estimated to have been weak in the September quarter, owing to softer global demand for coal.”

Traders were pricing in a 68 percent chance Stevens will reduce the key rate by a quarter point to 3 percent at the next meeting in December, up from 64 percent before the release of the minutes, swaps data compiled by Bloomberg showed.

After the October rate cut, “the average interest rate on outstanding housing loans was now about 75 basis points below the post-1996 average,” policy makers said in the minutes.

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