RBA Sees Rate Cuts Working as Currency Helps Stabilize EconomyMichael Heath
The Reserve Bank of Australia said the economy is responding to low interest rates and Deputy Governor Philip Lowe indicated a higher currency and savings levels allowed for lower borrowing costs even as mining boomed.
The impact of the policy easing “still had further to run,” the RBA said in minutes today of the March 5 meeting where it kept its key rate at 3 percent. “While further reductions may be required, on the information currently to hand it was appropriate to hold rates steady.”
Australia’s dollar averaged $1.0380 in the past two years, more than 30 cents above the level of the prior two decades, spurred by near-zero rates in the U.S. and Japan, and the crisis in the European Union. Lowe said today the EU’s decision to force Cypriot savers into a bailout was a “step back” for the region and could increase instability in the financial system.
“The fact that this approach of haircutting depositors has been sanctioned could lead the public to think it could happen again,” Lowe said in response to audience questions following a speech in Sydney. “It could make the system more susceptible to bank runs and that’s something that the authorities in Europe will have to watch very, very carefully.”
The RBA’s No. 2 official said in his speech earlier that the Australian currency’s strength and a savings ratio that soared after the financial crisis -- it was 10.1 percent last quarter, from minus 0.1 percent in the first three months of 2006 -- is helping stabilize the economy.
His analysis contrasts with complaints from manufacturers and retailers that have struggled to compete with cheaper imported products and consumers unwilling to spend. Lowe repeated that 1.75 percentage points of rate cuts in the 14 months through December are designed to help alleviate pressure from the exchange rate, and added that the currency’s strength was now driving productivity gains in the economy.
“Nowadays, there is a greater recognition that the high exchange rate is likely to be quite persistent and firms, including in the manufacturing sector, are adjusting to this,” Lowe told the Australian Industry Group. “This adjustment in business processes and models is often painful. But the fact that it is occurring is one reason why the Reserve Bank has been tentatively optimistic for some time that productivity growth would pick-up from the low rates experienced over much of the previous decade.”
The local dollar’s more than 50 percent climb in the past four years has been a drag on the economy, and the currency has remained above parity with the U.S. dollar for more than eight months, the longest stretch since it was freely floated in 1983. It was little changed after the minutes and traded at $1.0393 as of 12:56 p.m. in Sydney.
Traders are pricing in a 15 percent chance the RBA will lower borrowing costs by a quarter percentage point to a record 2.75 percent next month, swaps data compiled by Bloomberg show.
“We continue to get a sense that the RBA remains in wait and see mode,” said Alvin Pontoh, an Asia-Pacific strategist at TD Securities Inc. in Singapore. “There is some chance that the bank’s easing bias is softened at the next communiqué, but we don’t expect it to be dropped entirely until the bank is confident enough about the outlook for non-mining investment.”
The minutes released in Sydney today cited recent data suggesting a “modest increase” in non-mining investment was in prospect in the year through June 30, 2014.
Data last week showed employers in February added 71,500 workers, the biggest increase in almost 13 years, and the unemployment rate held at 5.4 percent as more people searched for work. The economy expanded 3.6 percent in 2012, the fastest pace in five years, as resource investment and exports outweighed subdued manufacturing and construction.
Still, business confidence declined last month, according to private data, home-loan approvals slid in January and the nation’s trade deficit was also twice as wide as economists forecast, according to government reports.
Global markets had rebounded this year as Europe appeared to have contained its crisis. That confidence was shaken three days ago when the Cypriot government announced a tax on deposits, seeking European aid after its banks lost 4.5 billion euros ($5.8 billion) on Greek sovereign debt and failed to meet European capital requirements. The U.S. called for a “responsible and fair” resolution to the financial crisis in Cyprus, the fifth euro country to seek a bailout since 2010.
“What we’ve seen in the last couple of days is a step back,” Lowe said today. “The idea that you would go and effectively haircut small depositors to help a government fiscal situation was not something that had really been countenanced by the international community before.”
The RBA last month lowered its economic growth and inflation forecasts as investment outside the mining industry remains elusive and a high local currency contains prices.
Lowe said the Australian economy has “adjusted pretty well” to the shocks in the global economy and monetary policy has played an important role by keeping inflation “low and stable.” It is committed to continuing that role, he said.
Without the appreciation of the exchange rate, “it is highly likely that the economy would have overheated and that we would have had substantially higher inflation and substantially higher interest rates,” Lowe said. “It is also worth adding that, in any case, it is unlikely that we would have avoided a substantial real exchange rate appreciation, with it coming through the more costly route of higher inflation.”