Re­serve Bank of Aus­tralia holds rates at record-low 2pc

The Pak Banker - - COMPANIES/BOSS -

Aus­tralia's cen­tral bank held its pol­icy nerve in the face of global eas­ing and fi­nan­cial mar­ket up­heaval that's frus­trat­ing ef­forts to shift the econ­omy away from min­ing. Yet it re­it­er­ated that lim­ited price pres­sure pro­vides scope to ease rates fur­ther.

Re­serve Bank of Aus­tralia Gov­er­nor Glenn Stevens and his board left the cash rate at 2 per­cent Tues­day, as fore­cast by all 27 econ­o­mists sur­veyed and in line with traders' bets. Stevens, in a lit­tle changed state­ment, re­peated that he was watch­ing the na­tion's la­bor mar­ket and global and do­mes­tic fall­out from mar­ket tur­moil.

"The board judged that there were rea­son­able prospects for con­tin­ued growth in the econ­omy," Stevens said to­day. "With growth in la­bor costs con­tin­u­ing to be quite sub­dued as well, and in­fla­tion re­strained else­where in the world, in­fla­tion is likely to re­main low over the next year or two."

The econ­omy's out­look is a re­ver­sal from late last year, when the record-low cash rate and a fall­ing Aussie dol­lar lifted busi­ness con­di­tions and fu­eled hir­ing in tourism and education, sug­gest­ing the econ­omy had turned the cor­ner. But in the past week alone, the col­lapse of a ma­jor re­tailer has cost about 2,500 jobs and crum­bling com­mod­ity prices prompted a large miner to an­nounce plans to fire 1,750 peo­ple.

One area where Stevens did amend his lan­guage was a tweak in the fi­nal sen­tence, say­ing low in­fla­tion "would" pro­vide scope for eas­ier pol­icy, rather than "may," as in last month's state­ment. Since the RBA's Feb. 2 meet­ing, do­mes­tic data has been al­most uni­formly neg­a­tive: retail sales stag­nated, busi­ness con­di­tions de­te­ri­o­rated, wage growth slowed to a record low, in­vest­ment plunged and un­em­ploy­ment un­ex­pect­edly spiked to 6 per­cent from 5.8 per­cent.

"The word 'would' seems stronger than 'may,' and there­fore we can only con­clude that the bank has some­what strength­ened its eas­ing bias," said Bill Evans, chief econ­o­mist at West­pac Bank­ing Corp. in Syd­ney. "We be­lieve the board is still some way away from de­liv­er­ing on this." The Aus­tralian dol­lar rose slightly af­ter the de­ci­sion, trad­ing at 71.36 U.S. cents at 4:51 p.m. from 71.17 cents be­fore the re­lease. Traders are pric­ing in at least one rate cut in the next six months.

The lo­cal cur­rency has climbed since touch­ing a near seven-year low in mid-Jan­uary. Stevens nev­er­the­less held to his views, reaf­firm­ing that "the ex­change rate has been ad­just­ing to the evolv­ing eco­nomic out­look." None­the­less, the global back­drop has de­te­ri­o­rated: China, Aus­tralia's key trad­ing part­ner, stepped up ef­forts Mon­day to cush­ion its eco­nomic slow­down amid plung­ing stock prices and a weak­en­ing cur­rency, cut­ting the amount of cash lenders must lock away. At the same time, dis­in­fla­tion or de­fla­tion in much of the de­vel­oped world has prompted cen­tral banks to set neg­a­tive in­ter­est rates, en­hanc­ing the at­trac­tive­ness of Aus­tralia's own bench­mark.

"Fi­nan­cial mar­kets have once again ex­hib­ited height­ened volatil­ity over re­cent months, as par­tic­i­pants grap­ple with un­cer­tainty about the global eco­nomic out­look and pol­icy set­tings among the ma­jor ju­ris­dic­tions," Stevens said. "Com­mod­ity prices have de­clined very sub­stan­tially over the past cou­ple of years. This partly re­flects slower growth in de­mand but also, in some key in­stances, large in­creases in sup­ply."

China's fac­tory gauge ex­tended its stretch of de­te­ri­o­rat­ing con­di­tions to a record seven months while a mea­sure of ser­vices fell to the weak­est in seven years, data showed ear­lier to­day. China is the world's largest buyer of iron ore, Aus­tralia's big­gest ex­port.

Do­mes­ti­cally, the out­look for em­ploy­ment wors­ened as elec­tron­ics re­tailer Dick Smith Hold­ings Ltd. an­nounced Thurs­day it was shut­ting 301 stores na­tion­wide. Ear­lier that day South32 Ltd., the world's big­gest man­ganese pro­ducer, said it would cut its work­force af­ter re­port­ing a 94 per­cent drop in first-half earn­ings fol­low­ing the col­lapse in com­mod­ity prices.

The RBA had hoped non-min­ing in­vest­ment would pick up to re­place an un­wind­ing of the re­sources boom. Yet data re­leased Thurs­day showed firms are plan­ning to re­duce their spend­ing by 19 per­cent in the fis­cal year start­ing July 1, the big­gest fall on record. Weak wages growth, too, sug­gests con­sumer spend­ing may strug­gle to sup­port eco­nomic growth. Work­ers' pay rose by a record-low 2.2 per­cent in the fourth quar­ter from a year ear­lier.

Aus­tralia's sta­tis­tics bureau is due to re­lease fourth-quar­ter gross do­mes­tic prod­uct data Wed­nes­day and econ­o­mists pre­dict 0.4 per­cent growth quar­ter-on-quar­ter and 2.5 per­cent yearon-year. The econ­omy has ex­panded at a be­lowa­v­er­age an­nual pace for all-but one year since the 2008 global fi­nan­cial cri­sis.

"The RBA will cut in­ter­est rates again this year re­flect­ing the risks around the global econ­omy, weaker than ex­pected com­mod­ity prices, still sub­dued growth in Aus­tralia at a time when the con­tri­bu­tion from hous­ing con­struc­tion is slow­ing, a more dovish Fed threat­en­ing a higher Aus­tralian dol­lar and con­tin­ued low in­fla­tion," said Shane Oliver, head of in­vest­ment strat­egy at Syd­ney-based AMP Cap­i­tal In­vestors Ltd. "How­ever, this may not come till May."

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