Central bank signals preference for low but stable interest rates, lower exchange rates but sparks rally in currency, Team IFM reports
Sydney, February 6: Announcing a policy shift, Australia’s central bank moved away from its easing bias towards a more neutral monetary policy stance on Tuesday to leave the overnight bank rate unchanged at 2.5 percent which led to a spike in the exchange rate for the Australian dollar.
“On present indications, the most prudent course is likely to be a period of stability in interest rates,” Reserve Bank of Australia Governor Glenn Stevens said in a statement.
“The exchange rate has declined further, which, if sustained, will assist in achieving balanced growth in the economy,” he said. “Beyond the short term, growth is expected to strengthen, helped by continued low interest rates and the lower exchange rate.”
He made no reference to earlier statements that the Aussie – as the Australian dollar is known colloquially – was “uncomfortably high”.
However, soon after the RBA governor’s statement, the Aussie rose two US cents to $89.42, a Sydney Morning Herald report said although it quoted analysts who felt that the surge was likely to be temporary and the Aussie would continue to weaken as it had done in the three months to Tuesday, having dropped 8 per cent, the most among group of 10 major developed currencies, according to Bloomberg.
Analysts say that by keeping the overnight interest rate untouched, RBA is trying to stoke construction in the housing sector so as to absorb excess labour created by falling investment in mining – and thereby create employment and boost consumption.
Housing Boost
In a statement on monetary policy last November, RBA had indicated higher property prices are needed to spur the building industry.
“Overall, the outlook for below-trend growth over the coming year reflects the substantial fall in mining investment, planned fiscal restraint and the still high level of the Australian dollar,” the November statement said, adding: “On the other hand, low interest rates are stimulating dwelling construction as well as prices and turnover in the established housing market.”
RBA then speculated that it was “likely” that these trends would be associated with stronger growth in household consumption over time. “Subsequently, this pick-up in demand, and the improvement in consumer and business sentiment, is expected to flow through to stronger non-mining business investment, which would contribute to higher GDP growth over 2015.”
That Tuesday’s statement by RBA Governor Stevens was a continuation of this thinking was not lost on analysts.
“They’ve shifted very firmly to a neutral bias,” Su-Lin Ong, head of Australian economic and fixed-income strategy at Royal Bank of Canada in Sydney, told Sydney Morning Herald.
“The fact they’ve taken out the reference to the uncomfortably high Australian dollar also tells you that they’re clearly pleased with what the currency has done over the past couple of months,” she said.
“For the first time in two years, the Reserve Bank of Australia expressed comfort with the current level of interest rates and their currency,” said BK Asset Management’s managing director for currency strategy, Kathy Lien, said.
“By dropping their easing bias, the RBA set off a wave of short covering in the Australian dollar last night that we expect to continue in the weeks to come,” Herald quoted Lien as saying.
The RBA is due to release its updated inflation and growth forecasts in its quarterly statement on monetary policy on Friday.
Governor’s Address
The full text of Governor Steven’s statement:
“At its meeting today, the Board decided to leave the cash rate unchanged at 2.5 per cent.
“Since the Board’s previous meeting, information on the global economy has been consistent with growth having been a bit below trend in 2013, but with reasonable prospects of a pick-up this year. The United States economy continues its expansion and the euro area has begun a recovery from recession, albeit a fragile one. Japan has recorded a significant pick-up in growth, while China’s growth remains in line with policymakers’ objectives. Commodity prices have declined from their peaks but in historical terms remain high.
“The Federal Reserve has begun the process of curtailing stimulus measures but financial conditions overall remain very accommodative. Long-term interest rates and most risk spreads remain low. Equity and credit markets remain able to provide adequate funding, but for some emerging market countries conditions are considerably more challenging than they were a year ago.
“In Australia, information becoming available over the summer suggests slightly firmer consumer demand and foreshadows a solid expansion in housing construction. Some indicators of business conditions and confidence have shown improvement. At the same time, with resources sector investment spending set to decline significantly, considerable structural change occurring and lingering uncertainty in some areas of the business community, near-term prospects for business investment remain subdued. The demand for labour has remained weak and, as a result, the rate of unemployment has continued to edge higher. Growth in wages has declined noticeably.
“Inflation in the December quarter was higher than expected. This may be explained in part by faster than anticipated pass-through of the lower exchange rate, though domestic prices also continued to rise at a solid pace, despite slower growth in labour costs. If domestic costs remain contained, some moderation in the growth of prices for non-traded goods could be expected over time.
“Monetary policy remains accommodative. Interest rates are very low and savers continue to look for higher returns in response to low rates on safe instruments. Credit growth remains low overall but is picking up gradually for households. Dwelling prices have increased further over the past several months. The exchange rate has declined further, which, if sustained, will assist in achieving balanced growth in the economy.
“Looking ahead, the Bank expects growth to remain below trend for a time yet and unemployment to rise further before it peaks. Beyond the short term, growth is expected to strengthen, helped by continued low interest rates and the lower exchange rate. Inflation is expected to be somewhat higher than forecast three months ago, but still consistent with the 2–3 per cent target over the next two years.
“In the Board’s judgement, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target. On present indications, the most prudent course is likely to be a period of stability in interest rates.