By Michael Heath
Australia’s central bank repeated it retains the option of reducing interest rates and said a further decline in the currency would aid the economy as resource investment slows, minutes of the Sept. 3 meeting showed. “Members agreed that the bank should again neither close off the possibility of reducing rates further nor signal an imminent intention to reduce them,” the Reserve Bank of Australia said in notes of the meeting, at which it left policy unchanged, released in Sydney today. “Some further decline in the exchange rate would be helpful.”
The September policy meeting was held four days out from an election won by Tony Abbott’s coalition, which ousted the Labor government of Kevin Rudd, pledging to cut red tape and lower taxes to boost the $1.5 trillion economy as a China-led mining investment boom crests.
Governor Glenn Stevens and his board have lowered borrowing costs by 2.25 percentage points since late 2011 to 2.5 percent as growth slows and unemployment rises. “Lending rates had declined to historically low levels as a result, which, together with the lower -- though still high --exchange rate, were continuing to provide a substantial degree of policy stimulus to the economy,” the minutes said. “This was most evident in the housing market, with the lags in the effect of policy meaning that earlier actions were still likely to take some time to have their full effect on demand more generally.”
Australian house prices rose by the most in more than three years in the second quarter, aiding the central bank’s aim of rebalancing growth from mining regions in the north and west toward services and manufacturers in the south and east.
That has been helped by a 10 percent drop in the Australian dollar in the past six months, the worst performer among group of 10 currencies, as China’s outlook darkened and Federal Reserve Chairman Ben S. Bernanke signaled that a tapering of bond purchases that devalued the greenback may be on the cards. The Federal Open Market Committee meets today and tomorrow to consider whether to taper its $85 billion-a-month in bond buying. Purchases will probably be cut by $10 billion, according to a Bloomberg survey.
“Members observed that the most notable impact of the change in expectations about U.S. monetary policy had been on emerging economies, where capital outflows had put downward pressure on exchange rates,” policy makers said, noting the impact on Brazil, India, Indonesia and Turkey. “They also observed that emerging market economies generally had become much better placed to handle this type of pressure than in the past, with most jurisdictions now holding large foreign exchange reserves relative to their short-term debt.”
The RBA last month lowered Australia’s growth forecast to 2.25 percent in the year to December 2013, compared with 2.5 percent forecast three months earlier. Employers unexpectedly cut payrolls by 10,800 in August and unemployment climbed to a four-year high of 5.8 percent as fewer people sought work, government data showed last week. “Indicators of labor demand remained soft,” policy makers said. “The slowing in wage growth in recent quarters was consistent with somewhat subdued conditions in the labor market, elevated concerns by households about unemployment and the lower inflation expectations of households, unions and businesses.”
Traders priced in about a 35 percent chance the RBA will lower borrowing costs by a quarter percentage point to a fresh record 2.25 percent by year’s end, according to interest-rate swaps data compiled by Bloomberg prior to today’s release. There are other signs that the central bank’s policy easing is impacting areas of the economy.
A Westpac Banking Corp. and Melbourne Institute survey of consumer confidence released Sept. 11 showed a 4.7 percent increase this month to reach the highest level since December 2010 as the prospect of a change of government and lower rates boosted sentiment. A National Australia Bank Ltd. survey of business confidence released a day earlier showed a surge to the highest level since May 2011, with sentiment lifting in all industries. “Given the substantial degree of policy stimulus in place, the board judged that it was appropriate to retain the current setting of interest rates,” the minutes showed.
The central bank will release its semi-annual assessment of the Australian financial system next week and members were briefed on its contents. “Given the importance of the New Zealand business to the operations of the major Australian banks, the board was briefed on developments in the New Zealand housing market and the macroprudential policy framework recently introduced by the Reserve Bank of New Zealand,” the minutes showed. “The Australian banking system remained in a relatively sound position.”