RBA Cuts Key Rate to Match Half-Century Low as Currency Holds Up

RBA Cuts Key Rate to Half-Century Low of 3% as Hiring Slumps
The central business district is seen between the Sydney Opera House and the Harbor Bridge in Sydney, Australia. Photographer: Ian Waldie/Bloomberg

The Reserve Bank of Australia cut its benchmark interest rate to the half-century low set during the 2009 global recession as hiring falters and an elevated currency hurts industries such as manufacturing and tourism.

Governor Glenn Stevens and his board reduced the overnight cash-rate target by a quarter percentage point to 3 percent, the central bank said in a statement in Sydney today. The sixth cut in the past 14 months was predicted by 20 of 28 economists surveyed by Bloomberg. The rate matches the level reached from April-October 2009 that was the lowest since 1960.

In his statement, Stevens said the local dollar remains “higher than might have been expected” given lower export prices and a weaker global outlook. His decision to ease the highest policy rate among major developed economies reflects Australia’s contained wage pressure, lower projected mining spending and an unemployment rate at a 2 1/2-year high.

“The cut is an attempt to smooth the transition from resources to the broader sectors of the economy that are currency and interest-rate sensitive,” said Martin Whetton, interest-rate strategist for Australia at Nomura Holdings Inc. in Sydney. “There feels like there’s a level of frustration in the statement about the currency.”

The so-called Aussie advanced after the decision, buying $1.0437 at 4:56 p.m. in Sydney compared with $1.0426 before the decision. The yield on three-year government debt advanced to 2.62 percent, up four basis points from yesterday. Australian financial stocks declined, with the S&P/ASX 200 Finance Index falling 0.5 percent.

‘Relatively Subdued’

“The near-term outlook for non-residential building investment, and investment generally outside the resources sector, remains relatively subdued,” Stevens said.

The local dollar’s 62 percent climb in the past four years has hurt exporters, forcing them and other companies to adapt. The number of Australian construction jobs fell by 70,200 to 978,000 in the 12 months through August, helping lift the unemployment rate to 5.4 percent. Mining employment gained by 44,600 over the same period to 271,000, according to government figures.

“Looking further ahead, with the labor market softening somewhat and unemployment edging higher, conditions are working to contain pressure on labor costs,” Stevens said. “Public spending is forecast to be constrained.”

Political Dividend

Prime Minister Julia Gillard and Treasurer Wayne Swan have pressed the central bank to loosen monetary policy as the Labor government bids for a A$44 billion ($46 billion) swing in the budget back to surplus before an election due later next year. The government is seeking to benefit from lower borrowing costs in an economy where about 90 percent of mortgages have floating rates.

“This rate cut is a consequence of prudent budget management and contained inflation,” Swan told reporters in Canberra after the RBA announcement. “We understand that not everybody in business or out there at work is on easy street but having much lower interest rates than we’ve had, particularly under the Liberal Party, is a big win for Aussie families.”

While the benchmark rate has returned to what Stevens in 2009 called an “emergency” setting, financial conditions are tighter than during the 2009 global recession. The nation’s four biggest lenders, accounting for 85 percent of the bank mortgage market, have withheld about a quarter of the RBA’s 1.5 percentage points of cuts since November 2011, excluding today’s move.

Stronger Currency

The currency averaged about 80 cents during the April-to-October period in 2009, when the benchmark was last at 3 percent, compared with an average of $1.035 this year.

The currency rose after the decision because Stevens’s statement was “hawkish,” said Sue Trinh, a senior currency strategist at Royal Bank of Canada in Hong Kong. She noted that today’s statement said monetary policy “was appropriate now,” a change from last month’s description that it was “appropriate for the time being.”

Prices of iron ore, the nation’s most valuable commodity export, have rebounded since reaching a three-year low on Sept. 5 after China announced spending on new subways and roads.

Weaker prices for raw materials last quarter and the elevated currency prompted mining companies including BHP Billiton Ltd. and Fortescue Metals Group Ltd. to put off projects and cut jobs.

Mining Boom

“Looking ahead, recent data confirm that the peak in resource investment is approaching. As it does, there will be more scope for some other areas of demand to strengthen,” Stevens said. “Private consumption spending is expected to grow, but a return to the very strong growth of some years ago is unlikely.”

Stevens is aiming to rebalance the two-speed economy, where mining regions in the north and west thrive and manufacturers, builders and retailers in the south and east struggle.

“There are indications of a prospective improvement in dwelling investment, with dwelling prices moving a little higher, rental yields increasing and building approvals having turned up,” Stevens said today.

With their benchmark rates near record lows, the U.S. Federal Reserve, European Central Bank and Bank of Japan have expanded their balance sheets since 2008 to try to resuscitate growth.

The fallout from the measures has included surging currencies in export-driven economies from Scandinavia to South Korea to Australia.

Labor Market

Australian help-wanted notices dropped for an eighth straight month in November, sliding 2.9 percent, an Australia & New Zealand Banking Group Ltd. report showed this week. Economists predicted the unemployment rate rose to 5.5 percent last month ahead of a Dec. 6 government report.

“There are signs of easier conditions starting to have some of the expected effects, though the exchange rate remains higher than might have been expected, given the observed decline in export prices and the weaker global outlook,” Stevens said. “While the full effects of earlier measures are yet to be observed, the board judged at today’s meeting that a further easing in the stance of monetary policy was appropriate now.”

The RBA’s next scheduled meeting is on Feb. 5.

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