RBA Says Rate Appropriate After Aussie Drop; Currency Gains

Australia’s central bank said the currency’s decline and past interest-rate cuts meant its policy setting was appropriate even as it maintained room for future reductions, according to minutes of its July 2 meeting.

“Given the exchange rate adjustment that was occurring, and with the substantial degree of monetary stimulus already in place, members assessed the current stance of policy to be appropriate,” the Reserve Bank of Australia said today in Sydney in minutes of the meeting at which it held the cash rate steady. The RBA said the inflation outlook was “slightly higher” due to the Aussie’s recent drop.

The currency climbed as traders pared bets on another rate cut next month after the commentary on inflation. Governor Glenn Stevens and his board reduced borrowing costs by 2 percentage points to a record-low 2.75 percent since late 2011, aiming to rebalance growth as a mining-investment boom peaks.

The inflation comment doesn’t “rule out an August rate cut per se, but it does dilute the urgency for a near-term rate cut, at the margin,” said Alvin Pontoh, a Singapore-based Asia-Pacific strategist at TD Securities.

A 12 percent decline in the Australian dollar last quarter eased pressure on the governor to cut rates again. The currency rose to 91.60 U.S. cents at 1 p.m. in Sydney from 91.11 cents before the minutes were released.

Traders were pricing in a 54 percent chance the RBA will lower borrowing costs by a quarter percentage point to a fresh record 2.5 percent next month, according to interest-rate swaps data compiled by Bloomberg. That’s down from a 65 percent chance yesterday.

Inflation Outlook

“The inflation outlook, although slightly higher because of the exchange rate depreciation, could still provide some scope for further easing, should that be required to support demand,” the RBA said in the minutes today. In minutes of its June meeting, it had said the inflation outlook “might provide some scope” for more rate reductions.

“There is a modest toning down of the easing bias,” TD’s Pontoh said.

In New Zealand, inflation slowed more than economists forecast last quarter as import prices dropped, adding to signs that a period of record-low interest rates will extend into next year. Consumer prices rose 0.2 percent from the first quarter, when they gained 0.4 percent, Statistics New Zealand said in Wellington today.

Dollar Strength

Australia’s currency averaged about $1 in the past three years, compared with about 70 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.

The Aussie’s slump since then 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.

“The news in recent months had generally been consistent with the outlook for growth being a little below trend and inflation remaining consistent with the medium-term target,” the minutes said. “The most significant change had been the depreciation of the exchange rate, though members noted that it remained at a high level.”

Since the RBA’s July 2 meeting, data has showed rising unemployment, subdued business and consumer confidence, a drop in building approvals and an increase in the value of home loan approvals. The jobless rate climbed to 5.7 percent in June, the highest since September 2009 and up from a revised 5.6 percent a month earlier, the statistics bureau said in Sydney July 11, as more people sought work.

Inflation Outlook

The decline in the Australian dollar “was expected to add a little to inflation over time, but the forecast was for inflation to remain consistent with the target,” the RBA said.

Inflation data for the second quarter is due to be released July 24. The RBA targets price increases of 2 percent to 3 percent.

The RBA said today it was possible the Australian dollar would depreciate further “as the terms of trade and mining investment declined, which would help to foster a rebalancing of growth in the economy.”

It said the outlook for mining and non-mining investment remained uncertain, and that mining investment was likely to stay high for some quarters “even though it looked to be close to, if not past, its peak.” Mining investment is then expected to decline more rapidly, the minutes said.

China Slowdown

Central to that outlook will be demand from China. The RBA today said it was too early to tell whether tightening financial conditions in the world’s second-largest economy would be sustained, or how that would affect economic activity there.

China’s economy slowed for a second quarter as growth in factory output and fixed-asset investment weakened, adding to risks that the government will miss its expansion target as Premier Li Keqiang reins in a credit boom.

China’s GDP rose 7.5 percent in April-to-June from a year earlier, the National Bureau of Statistics said in Beijing yesterday, equaling the median forecast in a Bloomberg News survey and down from 7.7 percent in the first quarter.

The RBA said forward-looking indicators of Australian labor demand implied modest growth in employment, and that conditions in the housing market continued to improve.

“The effects of lower interest rates were apparent across a range of indicators and, given the lags involved in the transmission of monetary policy, this process had further to run,” it said.

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