RBA Sticks With Stable Rate Outlook as Economy Transitions

Australia’s central bank reiterated it expects a period of stable interest rates as the government cuts spending and the economy transitions from mining-investment led growth.

“Low interest rates were working to support demand,” the Reserve Bank of Australia said in minutes released today from its July 1 meeting, where it kept the cash rate unchanged at a record-low 2.5 percent. “But members agreed that it was difficult to judge the extent to which this would offset the anticipated substantial decline in mining investment and the effect of planned fiscal consolidation.”

Governor Glenn Stevens, seeking to stoke domestic demand to compensate for a slowdown in mining investment, has seen his efforts hampered by an elevated currency. Over the past month, market pricing has switched toward bets of a further policy easing after the jobless rate returned to match a decade high, retail sales fell and the trade deficit widened.

In language echoing its July 1 statement, the RBA said “the exchange rate remained high by historical standards, particularly given the declines in key commodity prices, and was therefore offering less assistance than it otherwise might in achieving balanced growth in the economy.”

The Australian dollar -- which traded as high as about $1.11 and as low as 80 U.S. cents in the past five years -- has remained above 90 cents since March even as the price of some of the nation’s key commodity exports declined. It traded at 93.99 U.S. cents at 11:33 a.m. in Sydney.

Mirroring guidance in its July 1 decision, the RBA today said “the most prudent course was likely to be a period of stability in interest rates.” It forecast economic growth “a little below trend” over the next year or so.

Currency Jawboning

Traders were pricing 11 basis points of cuts to the benchmark cash rate over the next 12 months, according to an index of swaps from Credit Suisse Group AG.

Stevens, who expressed a preference for a weaker currency in late 2013, resumed such commentary this month.

“Most measurements would say it is overvalued, and not just by a few cents,” he said in a July 3 speech in Hobart.

Consumer confidence in May fell to its lowest level since August 2011 and has remained subdued since then after the Australian government’s budget flagged spending cuts and a new tax on high-income earners. The unemployment rate rose to 6 percent in June, matching the highest since July 2003.

“After picking up through last year, household consumption growth appeared to have eased,” the RBA said. “Forward-looking indicators had been mixed of late and consistent with only moderate growth in employment.”

Loose monetary policy has boosted the property market. Home prices rebounded 1.4 percent in June after slipping 1.9 percent in May, according to RP Data-Rismark’s Home Value Index report.

Housing Market

“Forward-looking indicators suggested that further strong growth in residential construction was in prospect, despite some easing of conditions in the established housing market over recent months,” the minutes said.

Australia can weather a slump in mining investment as low interest rates and infrastructure spending spur other industries, according to economist and RBA board member John Edwards. Replacing 2 percent to 3 percent of gross domestic product with non-mining sources of growth over five to six years will be “onerous but not difficult,” he wrote in a paper for the Lowy Institute last month titled “Beyond the Boom.”