RBA Saw Signs Lower Rates Are Working, Retains Scope to Ease

The Reserve Bank of Australia said there are indications that lower interest rates are starting to spur the economy and reiterated that tame prices provide scope to ease further if needed.

“Interest rate sensitive parts of the economy had shown some signs of responding to these lower rates, which were well below their longer-run averages, and further effects could be expected over time,” minutes of the Feb. 5 meeting released today in Sydney showed. The inflation outlook gives “scope to ease policy further, should that be necessary,” it said.

Governor Glenn Stevens and his board, who kept the benchmark rate unchanged this month, noted that the local currency’s strength doesn’t reflect the significant decline in the nation’s terms of trade. At 3 percent, the overnight cash rate target matches the level reached from April-October 2009 that was the lowest since 1960, as the central bank seeks to spur industries outside mining to compensate for an expected peak in resource investment this year.

“Thanks to inflation remaining well-contained, the RBA will ease further if domestic-demand doesn’t keep improving,” said Katrina Ell, an economist at Moody’s Analytics in Sydney. “But we are near the end of the easing cycle.”

The outlook for Australia’s biggest trading partner has brightened, the RBA said today. China’s economy grew 7.9 percent in the final three months of 2012 from the same period a year earlier, halting a seven-quarter deceleration. The World Bank forecasts economic growth will quicken to 8.4 percent this year, more than four times the pace of the U.S.

China’s Economy

“A wide range of indicators showed that growth in the Chinese economy had stabilized, underpinned by public spending and somewhat stimulatory financial policies,” the RBA said. “There had also been indicators of stronger growth of domestic demand” in east Asia, excluding Japan, the minutes showed.

The Australian dollar bought $1.0317 as of 2:42 p.m. in Sydney, from $1.0314 just before the minutes were released and $1.0306 yesterday in New York. Traders are pricing in a 32 percent chance the central bank will lower borrowing costs by a quarter percentage point to a record 2.75 percent next month, according to interest-rate swaps data compiled by Bloomberg.

The RBA said that the international outlook had improved as the U.S. managed a fiscal deal to avert tax increases and spending cuts. Since the RBA’s December meeting, global economic conditions had been “a little more positive and the downside risks had abated somewhat.”

2009 Lows

The central bank today said its rate reductions have “brought the average interest rate on outstanding housing loans to well below its longer-run average and only a little above its 2009 low.” Rates on small and large business loans were also close to their 2009 lows, it said.

Stevens is aiming to rebalance the two-speed economy, where mining regions in the north and west thrive while manufacturers, builders and retailers in the south and east struggle. The local dollar’s 62 percent climb in the past four years has hurt exporters, forcing them and other companies to adapt.

“More timely information pointed to growth in economic activity having picked up in the December quarter, with a significant contribution coming from exports,” the central bank said. “On the other hand, housing finance remained relatively subdued, and indicators suggested that non-mining business investment would continue to be weak in the near-term.”

Australian house prices rose last quarter by the most since June 2010 as lower rates lured buyers back into the market. The nation’s benchmark stock index climbed 4.9 percent last month.

Growth Forecast

The RBA this month reduced its economic growth and inflation forecasts as investment outside the mining industry remains elusive, the labor market softens and the high local currency contains prices.

In its quarterly statement released Feb. 8, the RBA predicted “below trend” 2013 growth of about 2.5 percent, compared with around 2.75 percent forecast in November. Consumer prices will rise 3 percent in the year to June 2013, compared with the 3.25 percent increase it had forecast three months earlier, the central bank said then.

“The slightly softer outlook for economic activity overall was expected to affect the labor market,” the RBA said. “Employment growth was forecast to remain modest over the course of the next year, before rising gradually towards the end of the forecast period.”

Weaker Retail

Since the RBA’s latest meeting, a government report showed retail sales unexpectedly fell for a third month in December, the longest stretch of declines in 13 years. A Feb. 7 report showed employers added part-time jobs in January and fewer people hunted for work, helping keep the unemployment rate unchanged at 5.4 percent.

Prices of iron ore, the nation’s most valuable commodity export, have rebounded since reaching a three-year low on Sept. 5 after China announced spending on new subways and roads.

“Iron ore prices had run well ahead of Chinese steel prices in recent months and it was widely expected that iron ore prices would not be sustained at these high levels,” the RBA said.

The RBA’s next scheduled meeting is on March 5.

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