RBA Sees Rebound Chances Rising, Holds Rate-Cut Door Open

  • Inflation is forecast a little lower than expected earlier
  • RBA says prospects for economic improvement have firmed

Australia’s central bank saw rising chances of an economic rebound in coming months, while holding the door open for another interest-rate cut depending on shifts in the outlook for inflation.

Reserve Bank of Australia Governor Glenn Stevens Tuesday kept the benchmark interest rate at a record-low 2 percent, against the anticipation of a minority of economists who had called for a quarter-point cut today. The local dollar rallied after the statement, even as the RBA cited that “the outlook for inflation may afford scope for further easing of policy, should that be appropriate to lend support to demand.”

The explicit bias toward further easing follows a pause in rates by the RBA for the past six months after it reduced borrowing costs by 2.75 percentage points since late 2011 to bolster industries outside of mining. While housing construction has surged in the low-rate environment, other firms have proved more reluctant to spend, betting they can meet demand from highly indebted households via existing capacity.

“The easing bias is clear,” said Su-Lin Ong, head of Australian economic and fixed-income strategy at Royal Bank of Canada in Sydney who forecasts a rate cut in the first quarter of 2016. “But the onus is very much on the activity data to deteriorate” for the bias to be acted upon.

Gradual Improvement

The Australian dollar climbed 0.7 percent to 72 U.S. cents as of 4:26 p.m. in Sydney as traders saw the chance of a rate cut in December reduced to 30 percent from 60 percent before the latest decision. They see the possibility of a rate cut in the first quarter at better than 70 percent.

“The board judged that the prospects for an improvement in economic conditions had firmed a little over recent months and that leaving the cash rate unchanged was appropriate at this meeting,” Stevens said in a statement. “While GDP growth has been somewhat below longer-term averages for some time, business surveys suggest a gradual improvement in conditions over the past year. This has been accompanied by somewhat stronger growth in employment and a steady rate of unemployment.”

Credit data released Friday showed lending to businesses rose 1.2 percent in September from August, the fastest pace since 2008. The RBA maintains that the economy is traveling pretty well given the scale of the drop in mining investment, with the unemployment rate stabilizing at a little over 6 percent.

The central bank is due to update its forecasts for growth and inflation in its Statement on Monetary Policy released Friday.

Below-Average Growth

While a weaker Aussie helps local producers, some companies are still having to retrench to keep themselves viable. BlueScope Steel Ltd., Australia’s largest steelmaker, struck a deal last month to cut 500 jobs and freeze wages for its remaining workers in order to save its plant located south of Sydney.

The economy has also grown at below its average for six of the past seven years.

“Inflation is low and should remain so, with the economy likely to have a degree of spare capacity for some time yet,” Stevens said. “Inflation is forecast to be consistent with the target over the next one to two years, but a little lower than earlier expected.”

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