- Stevens flags firmer economic outlook, opens easing door
- Odds of a move in 2015 decline to 29% from 64% last week
Australian central bank Governor Glenn Stevens lived up to his reputation for occasionally confounding markets by saying he has scope to ease rates, while sounding bullish enough to cast doubt on a December cut.
The Reserve Bank of Australia left the benchmark at a record-low 2 percent on Tuesday, asserting economic prospects “had firmed” in recent months even as the inflation outlook allowed room for further rate reductions. The central bank shrugged off concerns about rising mortgage rates and focused on signs of improving business sentiment and stronger jobs growth. The outlook boosted the Australian dollar and prompted swaps traders to lower the odds of a cut by year end to 29 percent from 64 percent last week.
“Rate cuts are not imminent,” said Peter Jolly, the head of market research in Sydney at National Australia Bank Ltd., the country’s largest lender by assets. “The thing that would drive them to cut rates again would be if the economy turns down a bit. The key here is not the low-inflation statement but the economy-is-improving statement.”
While Australia’s economy is expanding at a below-trend pace, the unemployment rate held at 6.2 percent in August and September, down from the 13-year high of 6.4 percent reached in July. The rate will probably remain around current levels or move lower in the months ahead with jobs growth strengthening to 2 percent in the year to August, the RBA said in minutes of its October meeting.
Measures of business confidence, employment and capital expenditure ticked up in September, while credit to Australian companies climbed at the fastest pace since October 2008, reports from NAB and the RBA showed last month.
Australian retail sales climbed 0.4 percent in September and the nation’s exports rose 3 percent from a month earlier, the statistics bureau said Wednesday.
The central bank’s statement suggests that “getting a rate cut over the next three or so months relies on a turn lower across the activity side of the economy,” meaning labor market and business conditions as well as a further cooling in house price growth, Adam Boyton, Deutsche Bank AG’s chief economist in Australia, wrote in a report. “We expect the labor market to remain robust and hence continue to see the RBA cash rate at 2 percent for some time.”
Deutsche Bank and NAB were among 17 forecasters surveyed by Bloomberg who correctly predicted Tuesday’s decision, with the remaining 12 calling for a cut to 1.75 percent. Of those who predicted no move this month, five said in the poll published Oct. 30 that there would be a cut by the end of the first quarter next year.
The lack of consensus among analysts underscores the difficulty of predicting Stevens’ next move and the central bank board has wrong-footed the market on several occasions this year. Following a February reduction, markets priced in a 60 percent chance the RBA would lower its cash rate in March and an 84 percent probability of an April move, only to see Stevens stand pat on both occasions. The central bank eventually cut by a quarter of a percentage point in May.
The swaps market indicated as of 12:20 p.m. on Wednesday in Sydney a more than 70 percent chance of at least one reduction by the end of March, according to data compiled by Bloomberg. The Australian dollar bought 71.94 U.S. cents, up from 71.69 just before the RBA announcement on Tuesday.
Stevens provided some encouragement on Tuesday for those predicting additional cuts, saying that that “the outlook for inflation may afford scope for further easing of policy, should that be appropriate to lend support to demand.”
Measures of underlying year-on-year inflation in Australia unexpectedly slowed in the third quarter, with an average reading of 2.15 percent near the 2 percent lower bound of the RBA’s annual goal, a report last month showed.
“The Reserve Bank has clearly flagged that they’re going to lower their inflation forecasts,” said Andrew Ticehurst, an interest-rate strategist at Nomura Holdings Inc. in Sydney, who predicts a February reduction. “The key thought here for me is that low inflation allows a rate cut, but the RBA’s not yet convinced that the economy requires a rate cut, though we think that latter assessment will soften up a little over coming months.”