RBA Coy on Further Rate Cut After Holding Fire; Aussie Jumps

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Glenn Stevens
Reserve Bank of Australia (RBA) Governor Glenn Stevens. Photographer: Brendon Thorne/Bloomberg

Australia left its key interest rate unchanged at a record low and was coy on whether further cuts would be needed to boost growth, sending the currency higher.

Central bank Governor Glenn Stevens and his board kept the cash rate at 2 percent in Sydney Tuesday, as predicted by traders and economists. “Monetary policy needs to be accommodative” as the economy is likely to operate with spare capacity “for some time yet,” Stevens said.

Australia has had little success in stimulating industries outside housing as a decade-long mining boom winds down, with businesses planning to cut investment in the next 12 months by the most on record. Meanwhile, Sydney and part of Melbourne’s property market are in a low-rate-fueled bubble.

“They’re kind of in a wait-and-see mode,” said Su-Lin Ong, head of Australian economic and fixed-income strategy at Royal Bank of Canada in Sydney. “I wouldn’t say there’s a clear easing bias, but we know from the forecasts that it is probably more implicit.”

Stevens said in the final paragraph of his statement that the Reserve Bank of Australia would use data over the period ahead to determine whether its policy was correctly set to boost growth and keep inflation consistent with its target.

Market Reaction

The Australian dollar rose half a U.S. cent after the statement failed to chart an explicit course for policy and traded at 76.84 cents at 3:20 p.m. in Sydney, while stocks extended declines. Traders are pricing in 20 basis points of easing in the next 12 months, or less than a quarter-point cut.

Australia, an engine room of the decade-long global commodity boom, forecasts a 90 percent plunge in spending on mining projects, calling time on its biggest resources bonanza since the 1850s gold rush.

“With very slow growth in labor costs, inflation is forecast to remain consistent with the target over the next one to two years,” Stevens said.

The nation’s economic growth probably cooled to 2.1 percent in the first quarter from a year earlier, the slowest pace since 2013, economists predicted ahead of data tomorrow.

“Weak wages growth is going to keep inflation low even with a low exchange rate and that tells you quite clearly that if activity disappointed, then the labor costs-inflation story would give them room to ease further,” RBC’s Ong said.

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