RBA Holds Rate at Record-Low Saying Aussie May Slide Further
Governor Glenn Stevens and his board kept the overnight cash-rate target at 2.75 percent, the Reserve Bank of Australia said in a statement today in Brisbane, as predicted by 25 of 28 economists surveyed by Bloomberg News. The Aussie “remains at a high level” and may “depreciate further over time, which would help to foster a rebalancing of growth,” Stevens said.
A 12 percent decline in the Australian dollar last quarter has helped buoy manufacturing sentiment, easing pressure on the governor to cut rates again. Policy makers lowered borrowing costs by 2 percentage points since late 2011, seeking to shift growth toward employment-intensive industries such as construction as mining investment wanes.
“The RBA is in no hurry to move interest rates and will wait for the data to push them into action,” said Joshua Williamson, a senior economist at Citigroup Inc. in Sydney. “They’re not worried about inflation, despite the fall in the exchange rate, so if needed that will allow them to cut rates.”
The currency dropped, trading at 91.69 U.S. cents at 3:15 p.m. in Sydney, from 92.21 cents before the RBA’s statement. The nation’s three-year bond yield fell to 2.77 percent from 2.79 percent before the RBA’s decision.
Australia’s unemployment rate unexpectedly dropped to 5.5 percent in May from a revised 5.6 percent in April, government data showed, and consumer confidence jumped 4.7 percent last month as optimists outweighed pessimists in a private survey. Home prices in Australia’s state and territory capitals rose 3 percent in the first six months of 2013, and 1.9 percent in June, according to the RP Data-Rismark home value index.
“The economy has been growing a bit below trend over the recent period,” Stevens said today. “This is expected to continue in the near term as the economy adjusts to lower levels of mining investment.”
The currency averaged about $1.02 in the past three years, compared with about 72 cents in the prior two decades, spurred by the resource investment boom and near-zero interest rates in the U.S. and Japan. The Aussie’s strength squeezed manufacturers and Ford Motor Co. announced May 23 it would end production in the country after nine decades, with the loss of 1,200 jobs.
Since the RBA unexpectedly cut rates to a record low on May 7, the Aussie has dropped almost 10 percent and suffered the biggest worldwide slide last quarter after the Syrian pound. In minutes of last month’s meeting, the RBA said wage growth moderation would help contain inflation even as the currency depreciates.
In today’s statement, the central bank said: “The inflation outlook, as currently assessed, may provide some scope for further easing, should that be required to support demand.” It added that, “easier financial conditions now in place will contribute to a strengthening of growth over time.”
The currency slump also reflects slowing growth in China and comments by Federal Reserve Chairman Ben S. Bernanke, who said May 22 the central bank could scale back stimulus efforts should the jobs market outlook show sustainable improvement.
“A reassessment by the market of the outlook for monetary policy in the United States has seen a noticeable rise in sovereign bond yields from exceptionally low levels,” Stevens said in the statement. “Volatility in financial markets has increased and there has been some widening of credit spreads.”
Prime Minister Kevin Rudd, who returned to office last week after a three-year hiatus, has picked up the China risk.
“The China resources boom is over,” Rudd told parliament June 27, a day after ousting Julia Gillard as leader of the ruling Labor party. “The China trade itself represents such a huge slice of the Australian national economy that we are looking at one huge adjustment for this nation’s standard of living in the future unless we continue to act with appropriate policy responses.”
The Organization for Economic Cooperation and Development also said five weeks ago that a pronounced slowdown in China is a risk to the economy. Australian gross domestic product growth will slow to 2.6 percent in 2013, down from 3 percent projected in November, the OECD said in a May 29 report.
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