Stevens Says RBA Board Deliberated ‘Very Long Time’ on Pause

Reserve Bank of Australia Governor Glenn Stevens said the board “deliberated for a very long time” yesterday before keeping its key interest rate unchanged, sending the currency to the lowest level since September 2010.

The Aussie touched 90.53 U.S. cents and bets on a rate cut next month rose to 55 percent from 37 percent after the comments, which Stevens made today at the introduction of a speech in Brisbane, where the RBA board met yesterday. The remark was intended as an aside, according to an RBA official who asked not to be named, citing bank policy.

Three of 28 economists had predicted a rate reduction, while swaps traders had seen about a 20 percent chance of a move yesterday. Stevens and his board have left the overnight cash rate target unchanged at a record-low 2.75 percent for the past two meetings as the currency slid 12 percent last quarter, easing pressure on the economy.

“Perhaps the decision not to cut yesterday was closer than the market was anticipating,” said Derek Mumford, a director at Rochford Capital, a currency risk-management company in Sydney.

Policy makers lowered borrowing costs by 2 percentage points between November 2011 and May to spur industries including residential construction as mining wanes.

Standing Pat

“The Reserve Bank Board in fact held its meeting here in Brisbane yesterday, at which we deliberated for a very long time and then elected to sit with the cash rate unchanged,” Stevens said in a departure from an e-mailed text of the speech.

The comment was “puzzling,” Ben Jarman, an economist at JPMorgan Chase & Co. in Sydney, wrote in a note to clients.

“Markets have interpreted the comment as stating that yesterday’s decision was a very close call, meaning that August is a decent chance for a rate cut,” he wrote. “This would be a needlessly indirect approach given that the RBA have in the past been happy to telegraph in the official statements situations where the call was finely balanced.”

In yesterday’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.”

‘Cold Comfort’

Today’s comment from Stevens on the deliberations is “cold comfort to those of us looking for a cut yesterday,” Michael Turner, a debt strategist at RBC in Sydney, wrote in a note to clients.

The governor told the Economic Society of Australia Business Luncheon in Brisbane that “if the economy ‘needs’ a lower exchange rate, it will probably get it.” He said the nation will need improved confidence to manage the end of a resource boom.

“We have to negotiate the downward phase of the investment boom over the next few years, which appears likely to pose significant challenges,” Stevens said today in the text of the speech. “Much depends on ‘confidence’ -- that intangible thing that is hard to measure and very hard to increase.”

He also urged the country’s political parties to maintain their “strong commitment” to fiscal responsibility. “The importance of that commitment will, if anything, be heightened in the future, given that significant challenges exist over the medium term in funding government initiatives that the community appears to want,” he said.

China Concern

Concerns are mounting that growth in China, Australia’s biggest trading partner, is slowing and will impact the local economy. Two gauges of Chinese manufacturing fell in June, reports showed this week, while a cash squeeze in the banking system adds to odds that Li Keqiang will become the first Chinese premier to miss an annual growth target since the 1998 Asian financial crisis.

Stevens was more optimistic on the world’s second-largest economy, saying the expansion in China “has moderated” over the past year or two to closer to 7.5 percent than the past 10 percent rate. “Most of the data we are seeing from China are consistent with that pace. This is what the Chinese authorities have been saying they want to achieve.”

Australia’s Prime Minister Kevin Rudd, who returned to office last week after a three-year hiatus, is reshaping the government’s economic message and abandoning the optimism of his predecessor Julia Gillard, warning the end of the China boom may mean swelling unemployment unless it’s managed carefully.

Growth Transition

Stevens said improved sentiment will be required to help Australia make the transition to other sources of growth.

“Confidence seems pretty subdued right now,” he said. “We are talking here about confidence that the future will be characterized by growth, that there will be customers for products, that innovations are worth a try, and so on.”

The Australian economy, which bucked the global recession in the wake of Lehman Brothers Holdings Inc.’s 2008 collapse, grew at its slowest annual pace in almost two years in the first three months of 2013. The Australian Industry Group’s gauges for manufacturing, services and construction have all shown a contraction since at least March 2012.

Since the central bank unexpectedly cut rates on May 7, the Aussie has dropped about 10 percent and suffered the biggest worldwide slide last quarter after the Syrian pound.

‘Too High’

“The exchange rate was somewhat too high for a period,” Stevens said in his speech. “It is no secret that I, for one, have been surprised that the foreign exchange market has taken as long as it has to reflect the fact that the terms of trade peaked some time ago -- nearly two years ago, in fact. In the end, though, market-based exchange rates do eventually adjust.”

He said pressure from the sustained strength of the currency had led to greater efficiency among businesses.

“My assessment is that at the level of enterprises, efforts to improve productivity have been stepped up under the pressure of the high exchange rate and structural change,” Stevens said. “But we should still be asking whether there are things in the way of faster improvement. Is the combination of regulatory structures of various kinds -- however well-meaning and valid in their own terms -- imposing unnecessary and excessive costs of compliance, or creating undue complexity for business?”

Australia’s unemployment rate unexpectedly fell to 5.5 percent in May from a revised 5.6 percent, 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.

“We have a better starting point going into this episode than we might have had, or than we have had on other occasions,” Stevens said today. “On this occasion, the resources boom -- a bigger one than anything seen for at least a century -- was accommodated without a big rise in inflation, or a big run-up in leverage or an unsustainable asset price boom.”