RBA Gets Comfortable at 2% as Stevens Stops Sweating on Currency

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Glenn Stevens seems to be relaxing his finger on the monetary-policy trigger.

Having slashed Australia’s cash rate twice this year, the central bank chief is getting some of the results he’s been looking for and has kept the target unchanged at 2 percent for three straight meetings. The Aussie dollar has fallen firmly below the 75 U.S. cent level Stevens said last year he would prefer, employment growth has strengthened and policy makers predict inflation will remain on target.

Tuesday’s meeting was the first time in more than a year the Reserve Bank of Australia’s interest-rate announcement didn’t indicate further currency depreciation might be warranted. That sparked the biggest intraday surge in more than two months after Stevens surprised traders who’d boosted bets on further declines in the currency for the past six weeks.

“They had the opportunity to talk down the currency and they didn’t take it,” said Ben Alexander, a principal at Ardea Investment Management Pty in Sydney. “The currency has already come down a fair way. The unemployment rate looks a bit more favorable. They could cut if things deteriorate, but we’re kind of hoping that they don’t need to.”

The Australian dollar bought 73.63 U.S. cents as of 12:30 p.m. on Wednesday in Sydney, down 21 percent over the past year. The RBA’s omission of previous comments that “further depreciation seems both likely and necessary” helped drive the currency up as much as 2 percent in the aftermath of the decision on Tuesday.

RBA Comfort

“They are getting to be more comfortable with the current state of the economy and are unlikely to be making any changes to their cash rate setting any time soon,” said Paul Bloxham, HSBC Holdings Plc’s chief economist for Australia. The changing currency language “implies that they’re getting a bit more comfortable with the way that the Aussie dollar’s behaving.”

Swaps markets indicated about an 60 percent chance that the RBA will implement another quarter-point cut within the next year, after being all but certain of a reduction at the end of last week, according to data compiled by Bloomberg. The three-year bond yield was at 1.99 percent, while the 10-year rate was at 2.82 percent.

Commodities Slump

With valuations for major exports such as iron ore and coal having dropped amid supply gluts and a slowdown in China, the RBA said that “the Australian dollar is adjusting to the significant declines in key commodity prices.” The prospect of U.S. interest-rate increases may add to downward pressure.

The RBA altered its labor-market language, noting that “while the rate of growth has been somewhat below longer-term averages, it has been associated with somewhat stronger growth of employment and a steady rate of unemployment.”

Government employment figures are due on Thursday and the median estimate among economists surveyed by Bloomberg signals employers added 10,000 jobs to payrolls in July. More than 120,000 positions were created in the first half as the jobless rate fell to 6 percent in June from 6.3 percent in January.

“It’s clear that the RBA is now more directly recognizing that the unemployment rate looks as though it’s stabilized and may have passed its peak,” said Bloxham. “If the unemployment rate is truly past its peak, it’s very rare for the RBA to cut interest rates further once the unemployment rate is falling.”

While the governor reiterated this week that the economy is likely to be operating with spare capacity for some time still, he has recently raised the issue of whether Australia’s potential growth rate has in fact changed.

Barclays Plc economist Kieran Davies sees this as an issue that will be explored in the RBA’s quarterly Statement on Monetary Policy this Friday.

“If the RBA totally rethinks its view on the labor market and forecasts a broadly stable unemployment rate of 6 percent, we would view this as a strong signal of the RBA’s reluctance to cut rates further,” Davies wrote in a note on Tuesday. “The renewed weakness in the exchange rate tempers the risk of a further cut, but the RBA is clearly hoping for a larger drop given the bigger decline in commodity prices.”