Reserve Bank of Australia Governor Glenn Stevens said further policy easing is possible and the currency is “very likely” to fall further as his board warned that the nation’s investment outlook is weak.
“Interest rates should be quite accommodative and the question of whether they should be reduced further has to be on the table,” he said in New York, while acknowledging the risks. “Across much of the world, too much weight is being put on monetary policy to try to achieve what it can’t: a durable and sustainable increase in growth, in an environment where private leverage is already rather high or even too high.”
In minutes Tuesday of their April 7 meeting, RBA board members said mining investment could fall more this year than its 13 percent drop in 2014 and the oil price drop could hurt the natural gas industry. The bank said forward indicators and liaison suggested non-mining investment, which it hopes will pick up slack from the resources boom, “was likely to remain subdued, and could even decline, over the next year or so.”
The RBA lowered its key rate to 2.25 percent in February and has stood pat at its two subsequent meetings, judging the economy can go without further stimulus while regulators get a handle on investors scooping up property in Sydney. Stevens and his board joined about 30 counterparts worldwide in easing policy this year to counter disinflation and encourage spending as Australia’s economy struggles to find new avenues of growth.
Stevens, in his speech in New York on Monday, recalled pledges made at the Group of 20 summit to boost global gross domestic product by 2 percent over the next five years, a plan that demanded government policy programs rather than low rates.
Data Tuesday showed weekly consumer confidence in Australia declined to an eight-month low.
“The headwinds facing the economy do not seem to have eased that much,” said Stephen Walters, Sydney-based chief economist at JPMorgan Chase & Co. “Cutting the cash rate still may be necessary to aid the economy’s long-waited rotation, and to get a recalcitrant Australian dollar to behave.”
The local currency has fallen about 12 percent against the U.S. dollar in the past six months as the price of iron ore, the nation’s key export, slumped on increased supply and weaker demand from China. It traded at 76.91 U.S. cents at 1:14 p.m. in Sydney from 77.25 cents in New York Monday.
The Australian dollar “will very likely fall further yet, over time,” Stevens said, adding that the depreciation encourages import substitution. “I’ll be a bit surprised actually if it doesn’t go down some more,” he said later in a question and answer session.
Traders priced in about a 75 percent chance the RBA will cut rates by another quarter percentage point to 2 percent at its May meeting, swaps data compiled by Bloomberg showed.
The minutes showed policy makers aren’t certain that low rates are encouraging consumers and businesses as much as they did in the past, given Australia’s record-high household debt. Board members also said they want to look at more data, including inflation figures due Wednesday, to gauge the impact of the February rate cut.
“They noted that the responsiveness of borrowers and savers to changes in interest rates and asset prices was unusually uncertain in a world of very low interest rates and high household leverage,” the minutes showed Tuesday.
The RBA is also concerned about the impact of easy policy on property prices in Sydney, which jumped almost 40 percent from a 2012 trough and are an increasing risk to stability. “Members remained alert to the possibility that low levels of interest rates could foster imbalances in the housing market.”
In Tuesday’s minutes, policy makers also addressed “unusual trading” in Australia’s currency prior to rate decisions this year, suggesting a lack of liquidity may have intensified the effect and triggered automated trades.
Illiquid conditions “meant that small trades could move the price by relatively large amounts, and that once such movements occurred it would be highly likely that algorithmic trading strategies would exacerbate such movements,” the RBA said. “Internal work since the March meeting had not identified any evidence of procedural lapses or conduct that could have led to the early release of relevant information.”
Stevens, who this month was appointed chairman of the Financial Stability Board’s Standing Committee on Assessment of Vulnerabilities, made a broad sweep of the global environment, noting that while the international banking system is safer, there are potential risks in capital markets.
“Some valuations are stretched, credit spreads are compressed, there has been significant cross-border capital flow and liquidity may be less available than investors are assuming,” he said. “That raises the risk that a sell-off, were it to occur, could be abrupt.”