Aug. 20 (Bloomberg) -- Australia’s central bank said the currency’s direction will be important in setting policy and signaled further interest-rate cuts remain a possibility, according to minutes of its Aug. 6 meeting at which it reduced its benchmark rate to a record-low 2.5 percent.
“Regarding the communication of this decision, members agreed that the bank should neither close off the possibility of reducing rates further, nor signal an imminent intention to reduce rates further,” the Reserve Bank of Australia said in minutes of the meeting released in Sydney today. “The course of the exchange rate would be important.”
Governor Glenn Stevens and his board cut rates by 2.25 percentage points since late 2011 as growth slowed and unemployment rose. The Australian dollar, which declined 12 percent in the past six months, dropped as traders boosted bets on a rate reduction in December to more than 50 percent.
“A rate cut remains possible should the business sentiment and the non-mining economy show no meaningful signs of picking up in the next few months, or if the Australian dollar unexpectedly rallies,” said Alvin Pontoh, Singapore-based strategist at TD Securities.
The Aussie fell to 90.85 U.S. cents at 12:44 p.m. in Sydney, from 90.94 cents before the minutes were released. It has gained 1.8 percent since the quarter percentage point rate reduction on Aug. 6.
Traders raised bets on a rate cut in December to 55 percent, from 47 percent odds before the minutes were released, while pricing in a lower chance for a September reduction, interest-rate swaps data compiled by Bloomberg showed.
“With growth expected to remain below trend for longer and inflation to remain within the target even with the effects of a lower exchange rate, members concluded that a lower level of the cash rate would better contribute to achieving sustainable growth in demand consistent with the inflation target,” the RBA said in the minutes. “The board would continue to examine the data over the months ahead to judge whether monetary policy was appropriately configured.”
The RBA this month reduced its growth forecast to 2.25 percent in the year to December 2013, compared with 2.5 percent forecast three months earlier. Australia’s unemployment rate held at an almost four-year high of 5.7 percent in July as fewer people sought work, government data showed Aug. 8.
“Employment growth was continuing, but at a pace below the rate of growth of the labor force,” the minutes said. “Wages growth was slowing.”
Even so, there are signs that the central bank’s almost two-year easing cycle is impacting areas of the economy. Australian house prices climbed by the most in more than three years in the second quarter and consumer confidence rose 3.5 percent this month after the RBA’s latest rate cut.
“Borrowing for housing had picked up, as had dwelling prices, and there had been an increase in leading indicators of dwelling construction, but to date this had been moderate rather than strong,” the central bank said in the minutes.
While Australia’s terms of trade, a ratio of export prices to import prices, peaked in 2011, Australian industry has been squeezed by a currency that held above $1 from mid-June last year to May 9, the longest stretch above parity with the U.S. dollar since the Aussie was freely floated in 1983.
The currency “had declined since the previous meeting, though remained high by historical standards,” the minutes of the Aug. 6 meeting showed. “It was possible the exchange rate would decline further over time, which would assist in rebalancing growth in the economy, though it would also be affected by developments in other countries.”
The Australian dollar has depreciated as China’s outlook darkened and Federal Reserve Chairman Ben S. Bernanke signaled for the first time May 22 that a tapering of bond purchases that devalued the greenback may be on the cards.
The minutes showed board members were briefed on staff forecasts for global growth: “Aggregate growth of Australia’s major trading partners -- including China -- was expected to be a bit below its decade average in 2013 before picking up somewhat in the following year.”
Prime Minister Kevin Rudd, who has called the end of Australia’s China-led mining boom, has set an election for Sept. 7 and is framing the vote as a battle between David Cameron-style austerity from the opposition and his own program that allows the budget to remain in deficit to cushion growth. Polls show the opposition Liberal-National coalition leading Rudd’s Labor party on economic management.
Australian business confidence slumped to an eight-month low and remained “extremely poor” in the key mining industry as rate cuts and a weaker currency failed to encourage companies, a private report showed Aug. 13.
“The path of business investment spending would be affected by the turning of the cycle in resources investment, where indicators continued to suggest that a decline was likely over the next several years,” the RBA minutes showed. “Near-term prospects for business investment outside the resources sector remained subdued.”
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