RBA Shifts Toward Neutral After Cutting Rate to Record: Economy

Australia’s central bank damped expectations of further interest rate cuts after reducing its benchmark to a record low, sending the local dollar higher.

Governor Glenn Stevens cut the overnight cash-rate target by a quarter percentage point to 2.5 percent and said the Reserve Bank of Australia’s board “has previously noted that the inflation outlook could provide some scope to ease policy further.” That contrasted with last month’s view the outlook for prices “may provide some scope for further easing.”

“The RBA sounded pretty neutral,” said Alvin Pontoh, Singapore-based strategist at TD Securites. “There’s no hint here that they are in any position to follow this cut with another cut next month, so I take it as a signal they’re happy to keep rates on hold for the near term.”

Prime Minister Kevin Rudd, who called an election for Sept. 7, may benefit politically from the reduction in a nation where about 90 percent of mortgagees have variable-rate loans. The easing reflects contained inflation and falling commodity prices, and follows a four-month slide in the Aussie.

The local currency rose, trading at 89.79 U.S. cents at 5:50 p.m. in Sydney, from 89.22 cents before the decision.

“The Australian dollar has depreciated by around 15 percent since early April, although it remains at a high level,” Stevens said. “It is possible that the exchange rate will depreciate further over time, which would help to foster a rebalancing of growth in the economy.”

Lower Growth

Treasurer Chris Bowen last week lowered the government’s growth forecast and predicted the jobless rate will rise to an 11-year high by July. Today’s cut is the second this year and extends an easing cycle that began in November 2011, when the benchmark was lowered from 4.75 percent.

“The easing in monetary policy over the past 18 months has supported interest-sensitive spending and asset values, and further effects can be expected over time,” Stevens said today.

Home prices across the nation’s eight biggest cities rose 2.4 percent in the three months to June 30 after a revised 0.8 percent increase in the first three months of the year, according to the statistics bureau today. The gain was the biggest since the first quarter of 2010, and beat the median estimate of economists surveyed by Bloomberg News of a 1 percent increase.

Today’s rate cut was forecast by 26 of 27 economists surveyed by Bloomberg News. Traders pared bets on a September rate reduction to 19 percent odds, from 32 percent before the RBA decision, according to data compiled by Bloomberg.

Changing Stance

“They haven’t said that they have more room to cut rates,” said David Forrester, a Singapore-based senior vice president for Group of 10 foreign-exchange strategy at Macquarie Bank Ltd. “It’s considered more of a neutral bias than an easing bias. I think we’ll see a squeeze” higher in the Aussie, he said.

The central bank is seeking to boost non-mining industries of the economy that struggled with an elevated currency, underscored by Ford Motor Co.’s plan to close its local plants, resulting in 1,200 job losses. The nation’s mining investment expansion is predicted to wane as demand from nations including China slows.

The value of planned projects and those under consideration or possible fell 14.3 percent as of June 30 from the prior quarter, a Deloitte Access Economics report showed last month. The report predicted a “plateau” in investment as projects already in the pipeline roll out and warned that non-residential construction is unlikely to drive growth in Australia as spending by resource firms declines.

Rising Unemployment

The nation’s unemployment rate probably rose to 5.8 percent in July, matching the highest since June 2009, according to the median estimate in a Bloomberg News survey before an Aug. 8 report. The RBA will update its growth and inflation forecasts the next day.

Elsewhere, Philippine inflation eased to a four-year low in July, while Italy’s economy probably contracted for a seventh straight quarter in the three months through June from a year earlier, economists predict. The U.K. and Italy will report June industrial production data, and factory orders for the same month in Germany are due. The U.S. trade deficit probably narrowed in June.

Australia’s government on Aug. 2 cut its growth estimate for this fiscal year to 2.5 percent from 2.75 percent seen in May and said the unemployment rate will rise to 6.25 percent by the middle of 2014, emphasizing Rudd’s challenge as he tries to win elections after the governing Labor party trailed the opposition in opinion polls for most of the past year.

Political Battle

Rudd is framing the vote as a battle between David Cameron-style austerity from the opposition and his own program that allows the deficit to widen as it prioritizes jobs and economic growth. Labor trailed the opposition by 4 percentage points on a two-party preferred basis in a Newspoll published yesterday.

“All Australian families, working families in particular, are under cost-of-living pressure,” Rudd told reporters in Brisbane today, saying his government was committed to “making sure that our interest rates are as low as possible.” The opposition said a cut would reflect a weakening economy.

The political implications of the reduction “depend partly on how you view it,” said Su-Lin Ong, Sydney-based head of Australian economic and fixed-income strategy at Royal Bank of Canada. “A rate cut generally occurs when rate-sensitive sectors need some assistance. You’d have to conclude that growth is disappointing to the downside as are revenues and there’s downward pressure to the labor market.”

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