RBA Signals Aussie Drop Insufficient to Drive Growth Transition

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RBA Governor Glenn Stevens
Glenn Stevens, governor of the Reserve Bank of Australia, speaks during the Melbourne Economic Forum in Melbourne, Australia, on Sept. 25, 2014. Photographer: Carla Gottgens/Bloomberg

The Australian dollar’s 7 percent decline in the past month is insufficient to spur the nation’s transition to domestic drivers of growth, the central bank said today as it kept its benchmark interest rate unchanged.

“The exchange rate has declined recently, in large part reflecting the strengthening U.S. dollar, but remains high by historical standards, particularly given the further declines in key commodity prices in recent months,” Governor Glenn Stevens said in a statement today after a board meeting in Sydney. “It is offering less assistance than would normally be expected in achieving balanced growth in the economy.”

The Reserve Bank of Australia signaled little comfort in the currency’s lower level as it tries to foster demand and avoid a growth gap emerging from a fading resource investment boom. Stevens is also grappling with how to damp property investors speculating in the housing market, encouraged by the record-low 2.5 percent cash rate.

“Although most analysts think interest rates will be hiked in 2015, we expect rates will be left at their current lows until 2016 as the economy struggles to adjust to the end of the decade-long mining boom,” said Gareth Leather, Asia economist at Capital Economics Ltd. in London. While “low interest rates over the past couple of years have helped bring down the value of the Aussie dollar, it still remains strong by historical standards,” he said.

The Australian dollar traded at 87.53 U.S. cents at 3 p.m. in Sydney, unchanged from before the statement.

Property Market

The central bank began indicating from mid-September that it planned measures to target speculation in the housing market by people buying residential property as investments. That was a U-turn on past dismissals of macroprudential measures, including Stevens’s description of them in August as an “international fad.”

“Credit growth is moderate overall, but with a further pick-up in recent months in lending to investors in housing assets,” Stevens said today. “Dwelling prices have continued to rise over recent months.”

Australia’s economy slowed in the second quarter, expanding 0.5 percent from the previous three months, when it grew 1.1 percent, government data showed Sept. 3. The governor said the RBA “still expects growth to be a little below trend for the next several quarters” in his statement.

Unusually Volatile

Yet unemployment dropped to 6.1 percent in August from a 12-year high of 6.4 percent in July after the economy added a record 121,000 jobs.

“Labor market data have been unusually volatile of late,” Stevens said. “The bank’s assessment remains that although some forward indicators of employment have been firming this year, the labor market has a degree of spare capacity and it will probably be some time yet before unemployment declines consistently.”

The RBA says the nation’s housing market is becoming “unbalanced,” with home-loan approvals to investors almost 90 percent higher in New South Wales state than two years ago and 50 percent higher in Victoria. While the central bank’s comments have centered around investor lending, it hasn’t yet spelled out what action regulators may take. Assistant Governor Malcolm Edey and Luci Ellis, head of the RBA’s financial stability unit, told lawmakers last week that they expect a preliminary announcement before the end of the year.

“Increased investor participation in the property market is a concern and the introduction of macroprudential tools looks more likely,” Katrina Ell, an economist at Moody’s Analytics in Sydney, said before the decision. “Rate normalization will not be considered until the labor market shows sustained improvement.”

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