RBA Sees Further Rate-Cut Scope as Aussie Remains High

Australia’s central bank said it still has room to cut the benchmark interest rate from its record-low level and judged that the nation’s exchange rate remains high even after the biggest monthly drop since 2011.

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 Sydney. “The inflation outlook, as currently assessed, may provide some scope for further easing, should that be required,” Stevens said. The pause was predicted by 24 of 26 economists surveyed by Bloomberg News.

“The Reserve Bank has kept the easing bias firmly in place,” said Craig James, a senior economist at a unit of Commonwealth Bank of Australia, the nation’s biggest lender. “So we continue to pencil in the risk of another rate cut in August after the inflation data released in late July.”

Two percentage points of rate cuts in the past 20 months have boosted the property market, while a 7.7 percent decline in the Australian dollar last month helped buoy manufacturing sentiment. Policy makers are trying to shift growth toward industries such as construction in the nation’s south and east to spur hiring as mining investment in the north and west is predicted to peak this year.

The Australian dollar was little changed at 97.23 U.S. cents at 3:26 p.m. in Sydney, from 97.14 before the decision.

Easier Conditions

“The exchange rate has depreciated since the previous board meeting, although, as the board has noted for some time, it remains high considering the decline in export prices that has taken place over the past year and a half,” he said, a month after unexpectedly lowering borrowing costs. “The board judged that the easier financial conditions now in place will contribute to a strengthening of growth over time.”

The currency averaged about $1.03 in the past two years, compared with about 73 cents in the prior two decades, spurred by the resource investment boom and near-zero interest rates in the U.S. and Japan. The RBA says some of its earlier rate reductions were aimed to help offset the drag on growth from the Aussie’s strength.

The statement accompanying the decision was the shortest in word-length since October 2010 and the first that didn’t contain “China” since July 2011.

Instead, Stevens said global growth is “running a bit below average this year, with reasonable prospects of a pick-up next year.”

Japanese Wages

Elsewhere in the Asia-Pacific, Japan’s wages rose by the most in a year in April, gaining 0.3 percent from a year earlier to 273,427 yen ($2,746), government data showed.

In Spain, registered unemployment may decline for a third month in May, according to economists surveyed by Bloomberg News. In Brazil, industrial production in April is expected to rise from a year earlier, while the U.S. trade deficit probably widened to $41.1 billion in April.

Australia’s unemployment rate unexpectedly dropped to 5.5 percent in April as the economy added 50,100 jobs, more than four times the number predicted by economists. Government data last week showed building approvals surged 9.1 percent in April, more than twice the median of estimates. The median house price rose 2.6 percent in the first quarter from a year earlier.

“The easing in monetary policy over the past 18 months has supported interest-sensitive areas of spending and has been reflected in portfolio shifts by savers and higher asset values,” Stevens said in the statement. “Further effects can be expected over time. The pace of borrowing has thus far remained relatively subdued, though recently there have been some signs of increased demand for finance by households.”

China Risk

The Organization for Economic Cooperation and Development said last week that a pronounced slowdown in China, Australia’s biggest trading partner, is also 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.

Ford Motor Co. announced on May 23 it would end production in the country after nine decades, with the loss of 1,200 jobs. The closure was a blow to Prime Minister Julia Gillard, whose Labor party is trailing in polls ahead of a Sept. 14 election.

Still, government data last week showed mining companies in Australia plan to boost investment next financial year.

Santos Ltd., Australia’s third-biggest oil producer, said May 31 it expects to reach agreement with BG Group Plc to connect their pipelines, bolstering the supply of gas for its $18.5 billion Gladstone project in Queensland state. Santos, BG and a ConocoPhillips-Origin Energy Ltd. venture are building three developments in Queensland at a cost of more than $60 billion to tap rising Asian demand for liquefied natural gas.

Economic Transition

“Our economy is in transition and of course that won’t be seamless, particularly with the dollar still at high levels, but we start from a position of strength,” Treasurer Wayne Swan said after the decision.

While the local dollar eased last month, Ross Garnaut, who advised former Prime Minister Bob Hawke during the 1980s overhaul of the Australian economy, said it needs to drop by between 20 percent and 40 percent to restore the nation’s competitiveness.

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