Door Open to Rate Cuts in Australia, India After Pause Tuesday

Economists expect further cuts in interest rates in Australia and India after the central banks of the two nations kept monetary policy unchanged on Tuesday.

The Reserve Bank of Australia said it could ease more at future meetings after holding the overnight cash rate at a record low 2.25 percent as the economy grapples with tumbling commodity prices. While the Reserve Bank of India left the benchmark repurchase rate at 7.50 percent, analysts surveyed by Bloomberg estimate at least one more cut in 2015.

The key to the RBI’s next move will be whether banks saddled with bad loans and sliding profitability overcome their reluctance to lower lending rates. The RBA is relying on a 7 percent drop in the currency last quarter to boost local companies’ competitiveness while keeping its remaining policy powder dry.

“Both the RBA and the RBI only took a breather today,” said Frederic Neumann, co-head of Asian economics research in Hong Kong at HSBC Holdings Plc. “With growth lackluster and price pressures under control, more rate cuts are likely to follow soon, possibly before the end of the quarter.”

The Australian dollar rose immediately before the decision and was quoted at 76.99 U.S. cents at 5:35 p.m. in Sydney from 76.09 cents in the minutes before the announcement. While the decision wrong-footed markets, it was predicted by 17 of 30 economists surveyed by Bloomberg.

India’s benchmark equity index erased an intraday gain of 0.5 percent before the central bank’s announcement and was 0.5 percent down at 1:05 p.m. in Mumbai. The RBI decision was predicted by 33 of 42 economists surveyed.

Unscheduled Moves

Two unscheduled moves have already put India in the group at least almost 30 central banks that have eased monetary policy this year. Australia cut rates in February, for the first time since August 2013.

RBA Governor Glenn Stevens is seeking to avoid further encouraging a rampant Sydney property market. The central bank has also said growth in domestic demand is quite weak and the economy will likely operate with spare capacity for some time.

“The RBA will cut rates again in 2015 but is waiting for more data on how the economy is tracking,” Katrina Ell, an economist at Moody’s Analytics in Sydney, said before the decision. “We expect another 50 basis points worth of cuts, with a May cut likely after inflation data is released.”

Stevens said the central bank’s board would continue to assess the case for more action at forthcoming meetings.

“Further easing of policy may be appropriate over the period ahead, in order to foster sustainable growth in demand and inflation consistent with the target,” Stevens said in a statement.

‘Accommodative Stance’

RBI Governor Raghuram Rajan said that “going forward, the accommodative stance of monetary policy will be maintained, but monetary policy actions will be conditioned by incoming data.”

Most banks have yet to pass on two previous rate cuts. The three-month interbank rate was little changed last quarter at 8.64 percent while the policy repurchase rate was lowered by 50 basis points.

Rajan said on Tuesday that the RBI would issue guidelines shortly to encourage banks to change how they calculate lending rates so they are more sensitive to the policy rate.

“Right now it’s more important to ensure that the transmission of what they have already delivered happens,” Sonal Varma, a Mumbai-based analyst at Nomura Holdings Inc., said in an interview before the decision, referring to the Reserve Bank’s rate reductions.

The RBI said consumer price gains are set to moderate to 4 percent by August before firming up to 5.8 percent by March 2016. The central bank’s target is for 6 percent by January 2016.

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