RBA Bets Shift Toward Keeping Rates on Hold

Reserve Bank of Australia Governor Glenn Stevens Speaks Before the House Of Representatives Standing Committee on Economics

Glenn Stevens, governor of the Reserve Bank of Australia.

Photographer: Brendon Thorne/Bloomberg
  • Stevens has signaled a reluctance to reduce benchmark rates
  • Aussie near 80 U.S. cents may concern RBA, CIBC's Bennett says

Traders are increasingly betting Reserve Bank of Australia chief Glenn Stevens will sit tight on policy for the final six months of his tenure, as a commodities rebound reflects ebbing pessimism in the global economy.

His decade-long stint as RBA governor is coming to an end in September and the swaps market is pricing in just 15 basis points of interest-rate reductions in the coming six months. That compares with 28 basis points as recently as March 9. Although Stevens has acknowledged that benign inflation affords scope to ease again if needed, he hasn’t moved the cash rate from an already record low 2 percent since May last year and has signaled a reluctance to cut again.

Higher household spending and dwelling investment helped spur an unexpected acceleration in growth in the final quarter of 2015, underscoring the economy’s resilience even as it shifts away from building mines and China’s expansion slows. It’s also getting a boost from a recovery in iron ore prices. The paring of RBA bets comes as a stronger currency and easing moves from Europe to New Zealand put pressure on Stevens to add stimulus.

The rise in raw material prices “is a sign that there is more confidence generally in the economic outlook and that’s probably what’s driven that pullback in rate-cut expectations in Australia,” said Felicity Emmett, head of Australian economics at Australia & New Zealand Banking Group Ltd. in Sydney. “There does seem to have been a change in sentiment around the global outlook, around the risk of a sharper downturn and that’s evident in commodity prices.”

Economists Split

While the market is pricing in a reduced chance of easing, economists remain divided over the outlook, according to a March 4 survey by Bloomberg. Of the 27 polled, 13 reckon there will be a cut by the end of September, 13 are tipping no change and 1 has predicted an increase.

That division reflects a divergence in some of the economic indicators. The Australian economy grew by 0.6 percent in the final three months of last year and was 3 percent bigger than a year earlier, according to official data released this month. On the other hand, wages growth remains muted and unemployment climbed back up to 6 percent in January after the biggest quarterly jobs gain on record at the end of 2015.

While global market turmoil in the first few months of 2016 has increased risks, the RBA judged at its meeting on March 1 that the prospects for continued growth in the economy were “reasonable,” according to minutes released Tuesday. Household demand “continued to be supported by low interest rates and above-average employment growth,” the RBA said.

Currency Risks

Deputy Governor Philip Lowe, a possible successor to Stevens, last week said the economy had proved pretty resilient to the winding back of the mining investment boom and a commodities rout, aided by the combination of a lower Aussie, record-low wage growth and a flexible labor market. Like most of his global peers, he’d prefer a weaker currency, he said.

“The message from the bank seems very clear, that they are happy with the way things are progressing,” said Patrick Bennett, a strategist at Canadian Imperial Bank of Commerce in Hong Kong. “If we were to move up toward 80 U.S. cents, the bank would be concerned about that, because that would be a headwind against this rebalancing.”

Resurgent Aussie

The Aussie dollar has surged about 5 percent over the past month, helped by the advance in commodity prices as well as policy easing in the euro-area and New Zealand that have heightened the appeal of Australian assets. It traded at 74.95 U.S. cents as of 12 p.m. on Tuesday in Sydney after touching an almost seven-year low of 68.27 in January.

A stronger currency would not only hinder the expansion in services such as tourism but also put downward pressure on already tepid inflation. Australia’s core measures of price pressures are hovering near the lower end of the central bank’s target range of 2 percent to 3 percent.

“It will be difficult for the RBA to sit pat if inflation is at the bottom or a bit below their target band and unemployment remains elevated,” said ANZ’s Emmett, who predicts that the central bank will ease in May and August. “The risks are that the timing would have to be pushed out.”

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