pursuits

RBA’s Pause Seen Brief as Job Queues Lengthen, Aussie Gains

Updated on

Reserve Bank of Australia Governor Glenn Stevens is unlikely to keep his interest-rate powder dry for long if he wants to prevent currency gains and job losses.

Stevens wrong footed markets and economists by keeping the cash rate unchanged at 2.25 percent March 3, sending the Australian dollar up half a U.S. cent and adding pressure to an economy that grew below average last quarter and with unemployment at a 12 1/2-year high.

“The good work from the currency falling has been partly undone by this decision,” said Martin Whetton, a rate strategist at Australia & New Zealand Banking Group Ltd. “The economy’s ability to rebalance toward more currency and rate sensitive areas has been hampered. We’ve also had a jump in unemployment that would seem reason enough for the central bank to be cutting rates.”

Stevens, who lowered borrowing costs in February, judged Australia can go without further monetary stimulus for now while regulators try to get a handle on lending to investors who are scooping up property in the nation’s biggest city. House prices in Sydney have jumped 35 percent from a 2012 trough and are an increasing risk to economic stability.

“The bank is working with other regulators to assess and contain risks that may arise from the housing market,” the governor said in Tuesday’s statement.

Aussie’s Performance

The Australian dollar traded little changed at 78.25 U.S. cents at 12:38 p.m. in Sydney Wednesday from 78.17 cents the previous day, having gained 2.6 percent from its low immediately after the RBA’s February rate cut.

Australia’s economy grew 2.5 percent in the final three months of 2014 from a year earlier, according to government data released in Sydney Wednesday. That is below the economy’s annual average growth rate over the past 30 years.

The economy “is finding it hard to get the growth rate back up to a pace that will lead to reductions in the unemployment rate,” said Craig James, a senior economist at a unit of Commonwealth Bank of Australia. “The Reserve Bank will probably provide a helping hand with another rate cut.”

Unemployment climbed to 6.4 percent in January from 6.1 percent in December as the number of people employed fell by 12,200, government data released Feb. 12 showed. The central bank also lowered its growth and inflation forecasts in its quarterly monetary policy statement released last month.

Further Easing

Stevens said in Tuesday’s statement that “further easing of policy may be appropriate over the period ahead, in order to foster sustainable growth in demand.” Traders are pricing in two more quarter-point reductions in the next 12 months, according to swaps data compiled by Credit Suisse Group AG.

The RBA has reduced rates by 2.5 percentage points since late 2011, stoking the property market. The proportion of successful house auctions in Sydney was above 80 percent at the weekend for the fourth week in a row, the longest stretch on record.

“We can only assume the RBA is uncomfortable with the pace of lending to investors and Sydney house prices,” said Scott Haslem, UBS Group AG economist in Australia, who predicts the central bank will cut in May. “Unfortunately, while they are waiting, the Australian dollar is rising, intensifying the hit to the economy from falling commodity prices.”

(Updates with GDP data in seventh paragraph.)
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