Australia keeps key rate at record low in Stevens’s swansong

by NZ Adviser07 Sep 2016
(Bloomberg) -- Australia’s central bank stood pat on interest rates as it awaits further inflation data and weighs the impact of two cuts in the last four months.

In his final meeting, Reserve Bank of Australia Governor Glenn Stevens and his board left the cash rate at 1.5 percent Tuesday, as forecast by all 26 economists surveyed. Traders see little chance of further easing until after the release of third-quarter consumer-prices data late October, as the outgoing chief reiterated that inflation was expected to remain low for “some time.”

Stevens hands the leadership baton to his deputy Philip Lowe in just under two weeks. The new governor inherits an economy underpinned by increased resource exports, a housing construction boom and an uptick in services industries. But anemic wage growth and weak inflation are signaling plenty of spare capacity which, along with the impact from zero or negative rates in Japan and Europe, prompted the central bank to last month take borrowing costs to a new record low.

Tuesday’s statement “covers fairly familiar territory and leaves a reasonably clean slate for Phil,” said Su-Lin Ong, head of Australian economic and fixed-income strategy at Royal Bank of Canada in Sydney. “Issues over the traction policy gets as you move lower, trying to fight global flows, the search for yield and the impact on the currency are all bigger picture issues that Phil’s going to have to deal with.”

The Australian dollar was little changed after the decision, buying 76.27 U.S. cents at 3:45 p.m. in Sydney, compared with 76.29 cents before the statement.

Cross-currents in global monetary policy have boosted the Aussie, which has risen about 11 percent since a mid-January trough. That means the RBA will be closely watching its U.S. counterpart; if the Fed bites the bullet and tightens this year, that may see a depreciation in the local dollar which should aid currency-sensitive services industries.

“In Australia, recent data suggest that overall growth is continuing, despite a very large decline in business investment, helped by growth in other areas of domestic demand and exports,” Stevens said in his statement. “Labor market indicators continue to be somewhat mixed, but suggest continued expansion in employment in the near term.”

Inflation, Housing
Australia is also grappling with the developed-world quandary of weak inflation -- partly a factor of the economy adjusting after the mining boom to regain competitiveness and partly imported from abroad. The RBA has lately become more sanguine on Sydney’s housing boom, believing that macro-prudential measures in place are preventing poor lending practices.

“Taking account of the available information, and having eased monetary policy at its May and August meetings, the board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time,” Stevens said.

Traders predict incoming Governor Lowe could resume cutting the benchmark rate by December, though they see a move in the first quarter of next year as more likely.

Aside from rates and a weaker currency, fiscal policy is the other obvious lever to aid the economy. But Treasurer Scott Morrison has made it clear -- following warnings from rating agencies about the country’s AAA score -- that he’s focused on paying down debt instead of using low rates to borrow to fund infrastructure projects that could increase productivity.

“Australia has always been a net importer of capital, especially in the private sector,” Morrison said in a Bloomberg Address late last month. As a result, “we have less head room for government debt than other advanced economies that fund their own debt, and that’s why ratings agencies tend to be very focused on Australia’s deficit and debt position.”

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