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Stevens Judges RBA’s Rate-Cut Pause Prudent ‘for the Moment’

Reserve Bank of Australia Governor Glenn Stevens
Glenn Stevens, governor of the Reserve Bank of Australia. Photographer: Ian Waldie/Bloomberg

Australia’s central bank Governor Glenn Stevens said it was prudent to keep the nation’s benchmark interest rate unchanged “for the moment” as policy makers monitor the impact of previous reductions on the economy.

At a meeting Nov. 6, the board was aware “that a significant easing of policy had already been put in place, the effects of which were still coming through,” Stevens said yesterday in a speech in Melbourne. “In addition, the latest inflation data, while not a major problem, were a bit on the high side, and the gloom internationally had lifted just a little. So it seemed prudent to sit still for the moment.”

The Reserve Bank of Australia cut the overnight cash rate target by 1.5 percentage points in five moves from November 2011 to October before pausing this month at 3.25 percent. The RBA wants to encourage non-mining industries to take up some of the slack in an economy transitioning from the investment stage of a three-part resource bonanza to higher exports.

“As the ‘mining boom’ moves from its second to its third phase over the next year or two, the world economy will continue to present its own challenges,” Stevens said. “The world will have to live with euro-area anxiety for some years yet as a normal state of affairs.”

Stevens said Australia’s economy will also need to adapt to a slower pace of growth in China, higher national savings at home that have subdued consumer spending and a decline in the resource industry’s contribution to gross domestic product.

‘Quite Live’

“Every board meeting is quite live at the present time and it could easily be a small accumulation of data that tips the board from a no change to a further easing view,” said Ivan Colhoun, head of Australian economics and property research at Australia & New Zealand Banking Group Ltd.

Traders are pricing in a 63 percent chance that the RBA will reduce the key rate again next month, swaps data compiled by Bloomberg show. That would match the 50-year low of 3 percent at the height of the 2008-2009 global financial crisis.

The nation’s bonds fell, with 10-year yields rising five basis points, or 0.05 percentage point, to 3.21 percent as of 10:01 a.m. in Sydney. That’s the highest since Nov. 7. The rate slid to a record low of 2.70 percent on June 4.

The local dollar traded at $1.0387 at 10:07 a.m. in Sydney, little changed from late yesterday in New York.

‘Strength’ in Prudence

Responding to audience questions, Stevens said he counted as a “strength” the fact that Australian households are taking a more prudent approach to spending and borrowing. He said the nation’s currency is “a bit high,” though it is likely to come down at some point and people will probably start to complain about its weakness. The governor downplayed the significance of the International Monetary Fund potentially reclassifying the Australian dollar a reserve currency.

On the international outlook excluding Europe, the governor said in his speech that the U.S. economy has maintained its “slow healing” and America’s housing market may have “finally turned.” China’s economic slowdown didn’t amount to a hard landing, he said.

“My assessment is that the slowdown has been more material than had been expected a year ago, but not disastrously so,” Stevens said. “So the Chinese economy has not crashed. But neither is it likely to return to the sorts of double-digit percentage rates of growth in real GDP.”

Productivity Challenge

As the Australian mining boom evolves, companies will need to increase efficiency to grow national wealth, Stevens said, referring to the title of his speech to the Committee for Economic Development of Australia, “Producing Prosperity.”

“The accelerated structural change we are seeing in the economy for various reasons is likely to result in some improvement in productivity performance,” he said. “But the most that can be said, at this stage, is that the data are not inconsistent with that hypothesis.”

Stevens reiterated his surprise that the nation’s currency hasn’t declined much given the terms of trade, or ratio of export prices to import prices, peaked last year. The so-called Aussie has gained 5.6 percent in the past year, the strongest Group of 10 currency during that period after New Zealand’s dollar.

“The exchange rate may also have some role in helping the needed re-balancing,” he said. “A lower exchange rate would, of course, need to be accompanied by a pace of growth of domestic unit costs below that seen for much of the past five years, in order to maintain low inflation.”

In the speech, Stevens reiterated a line from minutes of the last policy meeting that were released yesterday that “further easing might be required over time.” He said households have made progress reducing debt burdens and at some point will be more inclined to spend.

“But a complex interaction of factors -- asset values and expectations about job security to mention two -- will be at work in ways that are not amenable to accurate short-term forecasting,” he said. “Overall, our assumption is that consumption will probably continue to grow at about trend pace, in line with income.”

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