RBA Holds Rates, Omits Reference to Need for Currency Drop

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Australia left its interest rates unchanged and omitted a reference to the need for the local dollar to fall further. The currency jumped more than 1 percent.

Central bank Governor Glenn Stevens and his board kept the cash rate at a record-low 2 percent, as predicted by markets and economists following reductions in May and February.

Stevens said in Tuesday’s statement the exchange rate “is adjusting to the significant declines in key commodity prices” after it fell through 73 U.S. cents in July. It is the first time in 18 months that he hasn’t signaled the currency was too high.

“It does look like they’ve watered down their jawboning of the currency,” said Su-Lin Ong, head of Australian economic and fixed-income strategy at Royal Bank of Canada in Sydney. “If you draw a longer bow it kind of waters down their easing bias because part of the reason you have such a bias is to keep pressure on the currency.”

Australia has so far had little success in stimulating industries as a decade-long mining investment boom unwinds. Businesses plan to cut investment in the next 12 months by the most on record as firms decide they can meet demand with existing capacity amid weak wage gains.

Stronger Employment

“While the rate of growth has been somewhat below longer-term averages, it has been associated with somewhat stronger growth of employment and a steady rate of unemployment over the past year,” Stevens said. “Overall, the economy is likely to be operating with a degree of spare capacity for some time yet.”

The Aussie rose after the statement and traded as high as 73.95 U.S. cents and was at 73.82 cents at 5:49 p.m. in Sydney.

Traders are pricing in a 50-50 chance of another rate cut by December as Australia, the developed world’s most China-dependent economy, struggles to cope with slumping prices for key resource exports.

“Monetary policy needs to be accommodative,” Stevens said. “Low interest rates are acting to support borrowing and spending. Credit is recording moderate growth overall.”

China’s leadership is preparing fresh fiscal spending to ensure that signs of economic weakening don’t put their 2015 growth target of about 7 percent out of reach, a danger that was underscored by a deterioration in manufacturing in July.

Yet Australia’s labor market has remained relatively resilient, aided by weaker wages growth, with unemployment at 6 percent in June. Economists predict that data Thursday will show the jobless rate climbed to 6.1 percent.

‘Hawkish Direction’

“There does seem to have been a significant shift by the RBA today in the hawkish direction with an effective removal of their mild, implicit easing bias based on the Australian dollar,” George Tharenou, an economist at UBS Group AG, said in a research report. “ We continue to expect the RBA to hold rates ahead.”

Similar to the U.S., debate is intensifying Down Under on whether potential growth is lower than earlier thought, which would help explain the stabilizing labor market. A reduced speed limit from the RBA would ease pressure to cut rates.

Cheap borrowing costs have also boosted the property market: prices in Sydney soared 18.4 percent in July from a year earlier, the fastest pace since December 2002.

“Dwelling prices continue to rise strongly in Sydney, though trends have been more varied in a number of other cities,” Stevens said, repeating past comments. “The bank is working with other regulators to assess and contain risks that may arise from the housing market.”

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