Photographer: Brendon Thorne/Bloomberg

RBA Seen Holding Fire, Watching Fed as Stevens Makes Final Call

  • All economists forecast no change at Tuesday’s policy meeting
  • Fed’s next move ‘critically important’ for Australia: AMP

Australia’s central bank is forecast to keep the benchmark interest rate unchanged at Governor Glenn Stevens’s final meeting Tuesday as policy makers hang on the U.S. Federal Reserve’s next move.

Stevens and his board will hold the rate at a record-low 1.5 percent following two cuts in the past four months, said all 26 economists surveyed by Bloomberg. Traders are pricing in a 40 percent chance of further easing by year’s end as they wait to see if U.S. rates rise in September. If the Fed does hike, the Australian dollar will probably fall and remove pressure on incoming Governor Philip Lowe.

“The Fed move is critically important for Australian policy,” said Shane Oliver, head of investment strategy at AMP Capital Investors Ltd. in Sydney. “If the Fed does nothing this month and comes out with a more dovish commentary then that’s going to put a lot of upward pressure on the Aussie dollar.”

Stevens hands the leadership baton to Lowe in about two weeks and leaves a mixed legacy: limited policy ammunition to revive anemic wage growth and inflation, while having steered the economy through the unwinding of a mining investment boom. As signs emerge that industries like manufacturing and services are beginning to step up expansion, that successful transition would put Lowe in a much more comfortable place.

“It looks like we’re heading to a stabilization if not improvement in non-mining investment,” AMP’s Oliver said. “That’s incredibly positive.”

Regardless of those signals, Australia’s economy is expanding at an annual rate of around 3 percent and unemployment is under 6 percent. Pessimists would note that resource exports, which require minimal labor and whose profits go offshore, account for much of the growth; the jobless rate is also flattered by a high level of underemployment.

Still, commodity prices that are so important Down Under have regained some of their losses, and the economy in China, Australia’s biggest trading partner, looks to have stabilized. The world no. 2 economy’s official factory gauge unexpectedly rose last month to the highest level in almost two years.

Fed Uncertainty

At the end of August, Fed Chair Janet Yellen said the case had strengthened for a U.S. rate rise. Vice Chairman Stanley Fischer then indicated that could happen this month and there could even be two hikes before year-end. The central bank has been on hold since its quarter-point increase in December last year.
Fed uncertainty has partly driven a 10 percent appreciation of the Australian dollar since its mid-January trough -- one of the economy’s main headwinds. The currency had been on a steady downward trend, helping to boost the competitiveness of local goods and services.

Like the markets, economists see the RBA on hold until at least November, after weighing up third-quarter inflation data and updating its quarterly forecasts. Beyond that, some economists predict the central bank will cut further to 1 percent, while a growing number are discussing whether it will turn to unorthodox policies as its ammunition diminishes.

There may be other options, according to Peter Costello, chairman of Australia’s sovereign wealth fund and the nation’s longest-serving treasurer. In terms of monetary policy, the global economy is now “seeing the ends of its capacity,” he said last week.

“What’s been forgotten in the U.S. and in Europe and in Australia, is what I would call structural policy, supply-side policy -- other levers like trade policy, like budget policy, like tax policy, like industrial relations policy,” Costello said on a call with reporters.

“I don’t think we can take any more weight on monetary policy. Interest rates are practically zero, we’ve had enormous stimulation through quantitative easing. We’re running out of shots and it’s time to move on other areas of policy,’’ he said.

Before it's here, it's on the Bloomberg Terminal.