RBA Says `Very Accommodative' Policy Apt, Aussie a Hindrance

  • Data suggest economy had continued to grow at `moderate pace'
  • RBA reiterates long-standing easing bias in place if needed

Australia’s central bank said “very accommodative” policy is appropriate given low inflation and reaffirmed the currency’s strength could complicate the economy’s rebalancing away from mining.

The Reserve Bank of Australia, in minutes of its April 5 meeting where interest rates were left unchanged at a record-low 2 percent, noted the economy’s 3 percent expansion in 2015 was better than forecast and “broadly consistent” with last year’s improved jobs market. It said recent data suggested the economy “had continued to grow at a moderate pace” in early 2016.
 
Still, the central bank reiterated on Tuesday that “continued low inflation would provide scope to ease monetary policy further, should that be appropriate to lend support to demand.”

The Aussie dollar has climbed more than 12 percent in the past three months, and is the best performer after Canada among a group of 10 major currencies, propelled by lower expectations of U.S. policy tightening and rebounding commodity prices. RBA Governor Glenn Stevens had been enjoying the fruits of stimulus in the economy as the jobs market strengthened, services like tourism and education boomed and the construction industry scooped up ex-miners.

The RBA reiterated Tuesday that “an appreciating exchange rate could complicate progress in activity rebalancing towards the non-mining sectors of the economy.” The local currency was little changed, trading at 77.73 U.S. cents at 1:05 p.m. in Sydney
 
The central bank’s comments that both global and domestic rates are “very” easy or accommodative, “is an even firmer floor under the 2 percent cash rate,” said Annette Beacher, head of Asia-Pacific research at TD Securities in Singapore.
 
Stevens is speaking in New York at 9:30 a.m. local time Tuesday in an address titled ‘Observations on the Current Situation’, which Beacher said has the potential to “jawbone the currency lower.”

Policy makers discussed the impact of exchange rate movements on the growth in net service exports, which contributed around half a percentage point to gross domestic product in 2015. “Members observed that this component of GDP was one of the most sensitive to changes in the exchange rate.”
 
The RBA noted at the meeting that on a trade-weighted basis the Aussie dollar had appreciated 4 percent in the prior month.

Investment Down 

Policy makers said a decline in business investment in the fourth quarter was in line with expectations and noted that mining investment had fallen to about 4 percent of nominal GDP from a peak of 8 percent in 2012.
 
Since the central bank’s meeting, the key metric of unemployment has declined to a 2-1/2 year low of 5.7 percent and business confidence and conditions surged. In response, traders have pushed out bets on a rate cut and now see just a 17 percent chance of an easing at the RBA’s May meeting.
 
“On all measures, wage growth remained at quite low levels and domestic cost pressures, more generally, remained subdued,” the central bank said Tuesday. 

“Combined with the appreciation of the exchange rate and the low level of inflation globally, this suggested that inflation in Australia was likely to remain low over the next year or two.”
 
First-quarter inflation is scheduled for release on April 27.

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