RBA Holds Key Rate at 2.5% Omitting Easing Scope

Australia’s central bank left its benchmark interest rate unchanged and omitted a reference to scope for more easing, sending the nation’s currency higher.

Governor Glenn Stevens and his board kept the overnight cash-rate target at a record-low 2.5 percent, saying in a statement that “the easing in monetary policy since late 2011 has supported interest-sensitive spending and asset values, and further effects can be expected over time.” The Reserve Bank of Australia’s decision was predicted by all 32 economists surveyed by Bloomberg News.

“The failure to reintroduce the word ‘scope’ to ease policy is essentially why the Aussie has rallied since the outlook doesn’t include a clear easing bias,” said Sean Callow, a Sydney-based senior currency strategist at Westpac Banking Corp. “It does add to the pause and definitely indicates that there’s no urgency to act again.”

Tony Abbott’s Liberal-National coalition leads Kevin Rudd’s minority Labor government in opinion polls ahead of the Sept. 7 election. An Abbott-led government may be aided as industries benefit from the Aussie’s 14 percent slide in 2013 and the RBA’s 2.25 percentage points of rate cuts over the past two years.

The Australian dollar climbed to 90.38 U.S. cents at 3:30 p.m. from 89.85 cents before the announcement. Traders are pricing in about a 50-50 chance of a rate cut by the end of the year, data compiled by Bloomberg from swaps contracts shows.

RBA Reluctance

“We caution against over interpreting today’s statement which comes amid the final week of an election campaign heavily focused on the economy, budgetary position, and jobs,” said Su-Lin Ong, Sydney-based head of Australian economic and fixed-income strategy at Royal Bank of Canada. “Risk reward continues to favor further modest easing as the economy struggles to transition towards stronger non-mining growth.”

There are signs the central bank’s almost two-year easing cycle is beginning to stimulate parts of the economy. Home prices rose 5.3 percent across Australia’s eight major cities in the year to Aug. 31, according to an RP Data-Rismark home value index. Sydney home prices recorded the biggest quarterly rise since April 2009, it showed.

The nation’s manufacturing and service industries have been squeezed by the strength of the Australian dollar, which held above $1 from mid-June last year to May 9, the longest stretch above parity since it was freely floated in 1983. It has depreciated as China’s outlook darkened and Federal Reserve Chairman Ben S. Bernanke signaled that a tapering of bond purchases may be on the cards.

Aussie Drop

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

The depreciation has come too late for Ford Motor Co., which announced in May it would end production in Australia after nine decades, with the loss of 1,200 jobs. The currency weighed on economic and employment growth in Australia’s populous southeast, denting the government’s standing.

The coalition leads Labor 54 percent to 46 percent on a two-party preferred basis, a Newspoll published yesterday in the Australian newspaper showed. The survey, conducted Aug. 30-Sept. 1 among 1,116 voters and with a margin of error of 3 percentage points, showed Abbott overtaking Rudd as preferred prime minister for the first time, 43 percent to 41 percent.

The Treasury last month forecast deeper budget deficits in the next three years and cut its growth estimate this fiscal year to 2.5 percent from 2.75 percent seen on May 14.

Automatic Stabilizers

Rudd has signaled Labor will allow the budget deficit to widen as automatic stabilizers kick in amid slowing growth.

“If we are re-elected on Saturday, what we will do is track back to surplus,” Rudd told Australian Broadcasting Corp. television’s Q&A program yesterday. “If you were to do it quicker than that, I really fear if Mr. Abbott implements his A$70 billion dollars’ worth of cuts, then you can run a risk of running the economy into recession.”

The coalition has said it would cut the public service by at least 12,000 positions and proposes an audit of government services. Employers unexpectedly cut payrolls in July by 10,200 and unemployment held at an almost four-year high of 5.7 percent, government data showed Aug. 8.

Australian business confidence slumped to an eight-month low, a private report showed Aug. 13, and remained “extremely poor” in the key mining industry.

Low Ammo?

The central bank doesn’t have “a lot of room left if there was some other unforeseen event in the world economy to make a difference,” Shadow Finance Minister Andrew Robb said in an interview with Bloomberg Television today. “The Reserve Bank has been relied upon, or pressured, to do the heavy lifting in the economy for the last few years.”

The government will report the economy expanded 2.4 percent from a year earlier in the three months ended June 30, according to a Bloomberg survey of 31 analysts before data due tomorrow.

“The economy has been growing a bit below trend over the past year,” Stevens said today. “This is expected to continue in the near term as the economy adjusts to lower levels of mining investment. The unemployment rate has edged higher.”

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