Australian central bank holds key rates

Reserve Bank of Australia leaves door open to more easing

SYDNEY

Australia’s central bank skipped a chance to ease and held rates at 3.25 per cent on Tuesday citing higher inflation at home and an improved global background, though it still left the door open for more stimulus if needed. The Australian dollar jumped half a cent as the market had been divided on whether the Reserve Bank of Australia (RBA) would choose to reinforce the impact of its October easing with a cut to 3 per cent. In the end, it chose to pause.

“At today’s meeting, with prices data slightly higher than expected and recent information on the world economy slightly more positive, the Board judged that the stance of monetary policy was appropriate for the time being,” RBA Governor Glenn Stevens said after the bank’s monthly policy meeting.

Analysts saw the use of “for the time being” as a sign the bank still had an easing bias and might yet chose to move in December or perhaps February depending on incoming data. (The RBA board does not meet in January.) “There are a few things they are worried about, but not sufficiently so that they have to do anything about it right now,” said Stephen Walters, chief economist at JPMorgan. “We do think they’ll cut. We’ve got December.”

A majority of economists polled by Reuters had expected a cut this week, but markets had been less sure, pricing in around a 50-50 chance of a move.

The steady decision saw the Australian dollar climb to a five-week high on its US counterpart at A$1.0426, while the euro sank to a two-month trough at A$1.2256.

Investors rowed back wagers on the scale of future easing with interbank futures now implying a 56 probability of a cut by Christmas, down from almost 100 per cent previously.

Overnight indexed swaps, which essentially show where the market thinks the cash rate is heading, put rates at 2.87 per cent in 12 months against 2.74 per cent on Monday.

Leaning against a cut this week was a surprisingly high reading for underlying inflation in the third quarter, which picked up to an annual 2.5 percent to be back in the middle of the RBA’s long-term target band of 2 to 3 percent.

The global outlook has also become a shade less gloomy, with data pointing to some stabilisation in China and steady, if slow, improvement in the United States.

The RBA has already eased by 150 basis points in the past year but Australian rates remain high relative to most of its rich-world peers.

With rates near zero in the United States, Japan and UK, those countries have had to take ever more exotic stimulus measures by buying massive amounts of government debt.

Still, RBA chief Stevens did note that lower prices for some of Australia’s key resource exports, notably iron ore and coal, impacted the outlook for mining investment.

“Looking ahead, the peak in resource investment is likely to occur next year, at a lower level than expected six months ago. As this peak approaches, the Board will be monitoring the strength of other compo- nents of demand,” he said.

With that peak in view, policymakers are trying to stimulate other sectors of the economy, and particularly home building. “Whilst the RBA expects higher population growth and lower interest rates to underpin a recovery in residential construction, we are less optimistic,” said Michael Turner, a strategist at RBC Capital Markets. Which is one reason he still expects further easing. “We thought 2.75 percent would be the low this cycle, and we still think that after today.”