Australia’s central bank said a weakening currency is assisting a transition away from mining investment, while adding that accommodative policy remains appropriate to support growth.
“Economic activity had generally been more positive over recent months,” it said Tuesday in minutes of its Aug. 4 meeting when interest rates were left at a record-low 2 percent. “The further depreciation of the Australian dollar was expected to impart stimulus to the economy through stronger net exports.”
Policy makers are gaining a degree of confidence that post-mining boom growth is gaining traction, citing recent stronger data including hiring. The Reserve Bank of Australia is also relying on its American counterpart to raise rates later this year, which could spur a further reduction in a local currency that has already dropped 8 percent in the past three months.
“There was likely to be a sizable market impact notwithstanding how well telegraphed the change in policy had been,” the RBA said of an expected Federal Reserve move. “It was likely that financial market volatility would increase and the U.S. dollar could appreciate further, including against the Australian dollar.”
The local currency traded little changed at 73.82 U.S. cents at 12:20 p.m. in Sydney.
“The tone seemed to us more upbeat than had been the case earlier this year,” said Adam Boyton, Deutsche Bank AG’s chief economist in Australia, adding that the cash rate was likely to remain at 2 percent for “some time.”
The RBA was a little more positive on key trading partner China, saying risks to growth in the world’s second-largest economy had “receded somewhat.” Still, the central bank said the government in Beijing’s “policy response to the recent volatility in Chinese equity markets had clouded the medium-term economic outlook.”
RBA Governor Glenn Stevens and his board have held rates for the past three months and signaled reluctance to cut further as house prices inflate in Sydney and Melbourne. The central bank said recent responses by lenders to measures imposed by the banking regulator that targeted property investors “would be expected to reduce the risks relating to the housing market.”
Even so, Stevens is still waiting for an improvement in business confidence as a precursor to higher investment by firms. Sentiment has been more positive, aided by tax cuts in the May budget, yet hurdles remain. Businesses plan to cut investment in the next 12 months by the most on record, wage growth is at levels unseen since the early 1990s recession and the economy has grown below its 3.3 percent average for six of the past seven years.
“There remained considerable uncertainty around the timing and strength of the recovery in non-mining business investment,” according to the minutes. “The period of significant structural change for the Australian economy associated with the winding down of the mining investment boom would continue for some time.”