Monday, November 4, 2013

Australia holds rate, wants lower A$ to balance growth

    Australia's central bank held its benchmark cash rate steady at 2.5 percent, as expected, but is clearly concerned over the recent rise in the Australian dollar, describing the exchange rate as "uncomfortably high" and saying that a "lower exchange rate is likely to be needed to achieve balanced growth in the economy."
    The Reserve Bank of Australia (RBA), which has cut its cash rate by 50 basis points this year for total cuts of 225 points since November 2011, acknowledged the recent improvement in household and business sentiment and expects private demand outside the mining sector to pick up speed, but added it was "still too soon to judge how persistent this will be."
    Economists had expected the RBA to maintain its policy stance at today's meeting, but are split over whether the bank has ended its easing cycle and were looking to the RBA's statement for clues to the direction of future policy. Apart from the stronger language on the Australian dollar, the RBA's statement was largely neutral, indicating that its policy is likely to remain on hold in coming months.
    The RBA said the economy's below-trend growth was likely to persist in the near term as it adjusts to lower levels of mining investment, but the full effect of central bank's easier monetary policy since late 2011 was "still coming through and will be for a while yet."

    "The Board will continue to assess the outlook and adjust policy as needed to foster sustainable growth in demand and inflation outcomes consistent with the target," the RBA said.
    Last year Australia's economy was hit by lower demand for its raw materials, especially from China, and the completion of mining projects and the RBA has been quite open in its wish for a lower Australian dollar to help boost exports and reduce the country's reliance on mining.
     But today's statement about the Australian dollar is much stronger than in recent months. In September, for example, the RBA dropped its earlier description of the A$ exchange rate as "high" and merely said that a lower exchange rate level would "assist" in rebalancing growth.
    Now, the RBA is describing the A$ as "uncomfortably high" and indicating that it needs the dollar to fall for the economy to overcome the effects of lower mining investment.
   In the first four months of the year, the A$ was above parity to the U.S. dollar but then started to weaken in early May in response to the RBA's first rate cut of the year, falling to a year-low of 89 cents to the U.S. dollar on Sept. 1.
    But since then the A$ has rebounded in light of improving economic data and was trading above 95 cents to the U.S. dollar today, up from 93 cents at its previous meeting in September.
    Australia's Gross Domestic Product rose by 0.6 percent in the second quarter from the first quarter for annual growth of 2.6 percent, up from 2.5 percent. The unemployment rate fell to 5.6 percent in September from 5.8 percent in August.
    Inflation eased to 2.2 percent in the third quarter from 2.4 percent in the second quarter and the RBA said this was consistent with its 2-3 percent medium-term target and repeated that is expects this to remain the case over the next one to two years.


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