RBA Says Rate-Cut Impact Evident, Retains Option for LooseningMichael Heath
Australia’s central bank said interest-rate reductions are affecting the nation’s economy, while retaining the option to loosen policy further to spur growth, minutes of the Oct. 1 meeting showed.
“The effect of low interest rates was evident across a range of indicators and had further to run,” the Reserve Bank of Australia said in the minutes released today in Sydney. “Members agreed that the bank should again neither close off the possibility of reducing rates further nor signal an imminent intention to reduce them.”
The Australian dollar touched the highest level since June and investors pared bets on cuts as they interpreted the central bank shifting to a neutral bias. Governor Glenn Stevens and his board left rates at a record-low 2.5 percent this month after cutting by 2.25 percentage points since late 2011 to try to rebalance the economy as mining investment crests.
The minutes are “light forward guidance pointing to a neutral stance,” said Joshua Williamson, a senior economist at Citigroup Inc. in Sydney. “The assessment of the economic outlook was generally favorable.”
The Australian dollar rose 0.4 percent to 95.28 U.S. cents at 12:22 p.m. in Sydney from yesterday, and touched the highest since June at 95.34. Traders are now pricing in a 27 percent chance of a rate reduction by May, compared with 47 percent odds seen a week ago, swaps data compiled by Bloomberg showed.
Policy makers are weighing a resurgent currency as data from China improved and the Federal Reserve delayed tapering its stimulus, with better local sentiment since a Sept. 7 election.
“Members noted two developments over the past month, namely the appreciation of the exchange rate and the pick-up in measures of both consumer and business confidence over recent weeks,” the minutes showed. “It was difficult to know how significant the effects of either of these developments would be, partly because it was uncertain whether they would be sustained.”
A private report last week showed business confidence surged in September to the highest level in 3 1/2 years after the election ended a hung parliament and low rates spurred sentiment. Consumer confidence dipped this month after rising following the election of the Liberal-National coalition led by Tony Abbott. Home prices in Australia’s biggest cities rose 3.7 percent in the three months through September, according to the RP Data-Rismark Home Value Index.
“Leading indicators pointed to a pick-up in dwelling investment over the period ahead,” the RBA said. “While credit growth remained moderate, there were signs of an increased appetite for borrowing, most notably among investors.”
While Australia’s unemployment rate unexpectedly declined to 5.6 percent in September as fewer people sought work, the International Monetary Fund said in a report last week that the jobless rate would rise to a 10-year high of 6 percent next year. The RBA said forward looking indicators of labor demand “remained soft” and its liaison indicated that employment intentions were “subdued” in recent months, particularly in mining and related industries.
“The information to hand at the meeting was consistent with growth of economic activity remaining below trend over the next year or so before an expected pick-up,” the minutes said. “Inflation was expected to be consistent with the target over the next one to two years.” The RBA aims for inflation of between 2 percent and 3 percent on average.
The Australian dollar has jumped 7 percent since Aug. 30., supported by improving Chinese data and the Fed’s decision to delay tapering its stimulus.
“The Australian dollar appreciated significantly against the U.S. dollar on the day of the Fed decision and had appreciated further over the past month following the release of stronger-than-expected economic data, particularly in China,” the minutes said. “However, members noted that the Australian dollar was still around 10 percent below its peak in April.”
Craig James, a senior economist at a unit of Commonwealth Bank of Australia, said the economy is improving, indicating the safest spot for the RBA is on the interest-rate sidelines.
“The Reserve Bank is seemingly in that ‘happy place’,” James said. “It is showing no inclination of either cutting or lifting interest rates and neither the firmer Aussie dollar nor rising home prices are sparking concern.”