RBA Says Aussie ‘Uncomfortably High’ as It Holds Key Rate

Australia’s central bank left its benchmark interest rate unchanged at a record low and said a weaker currency will be needed to achieve balanced growth.

Governor Glenn Stevens and his board kept the overnight cash-rate target at 2.5 percent, the Reserve Bank of Australia said in a statement today in Sydney, as predicted by all 31 economists surveyed by Bloomberg News. The Australian dollar dropped as Stevens said it remained “uncomfortably high.”

“The RBA is certainly using stronger language; I think they’re really trying to jawbone the Aussie dollar lower if they can,” said Paul Bloxham, chief Australia economist at HSBC Holdings Plc in Sydney who is also on the RBA shadow board of economists. “On the margin, it is probably a bit more dovish, in the sense that it’s very focused around the currency and the fact that the currency is still too high for them.”

Markets see little chance of a rate move in the next six months as a local dollar that was the best performing group of 10 currency last month hurts export-related industries and helps keep inflation in check. Low borrowing costs are driving up housing prices, suggesting the RBA may be reticent about adding to its 2.25 percentage points of rate cuts in the past two years.

“The easing in monetary policy that has already occurred since late 2011 has supported interest-sensitive spending and asset values,” Stevens said today. “The full effects of these decisions are still coming through, and will be for a while yet. The pace of borrowing has remained relatively subdued overall to date, though recently there have been signs of increased demand for finance by households.”

Aussie Drop

The Australian dollar declined to 94.85 U.S. cents at 2:55 p.m. in Sydney, from 95.02 cents before the decision.

“A lower level of the exchange rate is likely to be needed to achieve balanced growth in the economy,” Stevens said today. In last month’s statement accompanying an on-hold decision, Stevens said a lower currency “would assist in rebalancing growth in the economy.”

Stevens, in a speech last week, said the local currency’s level isn’t supported by costs and productivity in the economy and the nation’s terms of trade are more likely to fall than rise. “It seems quite likely that at some point in the future the Australian dollar will be materially lower than it is today,” he said in the Oct. 29 address.

Australian business confidence surged in September to the highest level in 3 1/2 years, a private report showed Oct. 8, as majority government and lower rates encouraged companies, even as employment conditions remained poor. Australia’s jobless rate probably climbed to 5.7 percent last month, economists predicted ahead of a Nov. 7 report.

“The economy has been growing a bit below trend over the past year and the unemployment rate has edged higher. This is likely to persist in the near term, as the economy adjusts to lower levels of mining investment,” Stevens said today. “Further ahead, private demand outside the mining sector is expected to increase at a faster pace, though considerable uncertainty surrounds this outlook.”

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