RBA Saw Signs Low Rates Working as It Keeps Cut Option: Economy

Australia’s central bank said there was “mounting evidence” interest-rate cuts were working, even as it retained the option of loosening policy to support growth in an economy battling an “uncomfortably high” currency.

“Given the substantial degree of policy stimulus that had been imparted, it was prudent to hold the cash rate steady while continuing to gauge the effects, but not to close off the possibility of reducing it further should that be appropriate,” the Reserve Bank of Australia said in minutes of its Nov. 5 meeting released in Sydney today.

Policy makers are balancing rising home prices against a high currency that’s weighing on industries such as manufacturing. Governor Glenn Stevens and his board reduced borrowing costs by 2.25 percentage points in the past two years to a record-low 2.5 percent to boost employment-intensive parts of the economy outside of resources, where investment is waning.

“They’ve still got that gentle easing bias in there,” said Tom Kennedy, an economist in Sydney at JPMorgan Chase & Co. “The dollar is very influential for the RBA as a lower dollar would assist rebalancing away from resource-led growth towards the more traditional sectors of the economy.”

The Australian dollar climbed to 93.83 U.S. cents at 12:22 p.m. in Sydney, from 93.65 cents before the minutes were released.

“There was mounting evidence that monetary policy was supporting activity in interest-sensitive sectors and asset values, and given the lags with which monetary policy operates, the stimulatory effects would likely continue coming through for some time,” the minutes said.

“At the same time, inflation remained within the target and the Australian dollar, while below its level earlier in the year, remained uncomfortably high,” policy makers said. “Members noted that a lower level of the exchange rate would likely be needed to achieve balanced growth in the economy.”

Overvalued Aussie

The Aussie dollar is about 6 percent overvalued at present, based on models the RBA is likely to employ, UBS AG estimated in a report last week. The central bank this month forecast below-trend growth and rising unemployment in 2014, with prices held in check as wage growth remains subdued.

Elsewhere, Japan is scheduled to report department store sales for October, while construction output data for the euro zone in September is due for release. In the U.S., the employment cost index likely climbed 0.5 percent in the third quarter, according to the median forecast in a Bloomberg survey of economists.

A September election that ended a hung parliament and low rates have improved households’ outlook, with a private report last week showing consumer confidence rose 1.9 percent in November. Government data also showed September loan approvals rose more than economists forecast.

Housing Recovery

“A range of indicators showed that dwelling investment was picking up and this was likely to continue,” the RBA said. “In time, non-resources business investment was also expected to increase.”

Australian employers cut full-time workers in October by the most in more than a year and unemployment held at a revised 5.7 percent, government data released Nov. 7 showed.

While labor market conditions “remained soft,” the RBA said “there were recent signs that a number of forward-looking indicators of employment growth were no longer declining.”