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Australian Economy

Helped by its massive natural resources, Australia has weathered the global financial crisis better than other Group of 20 economies. In 2012, its economy grew 3.1 per cent, compared with 1.6 per cent in the United States and 1.1 per cent in Canada. 

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Australia central bank keeps easing bias, talks down A$

PUBLISHED : Tuesday, 02 July, 2013, 1:43pm
UPDATED : Tuesday, 02 July, 2013, 1:43pm

Australia’s central bank kept its main cash rate at a record low of 2.75 per cent on Tuesday and said there might be room for further easing, given the local currency remained too high for comfort.

The Australian dollar duly slipped a third of a cent as the market took the Reserve Bank of Australia’s (RBA) comments as encouragement to sell.

“The Board also judged that the inflation outlook, as currently assessed, may provide some scope for further easing, should that be required to support demand,” RBA Governor Glenn Stevens said following the central bank’s monthly policy meeting.

“The Australian dollar has depreciated by around 10 per cent since early April, although it remains at a high level.”

The bank has long argued that a decline in the currency would support export earnings and help the economy deal with a coming peak in mining investment.

“Anything above 90 cents is still described as high,” said Michael Turner, a strategist at RBC Capital Markets. “So 85 cents is probably somewhere they will start thinking there is genuine easing on the exchange rate front consistent with what’s happening with the terms of trade.”

A falling currency is a big windfall for Australia’s miners as their exports are priced in US dollars. Analysts estimate, for instance, that every US cent the Aussie falls is worth A$100 million to the bottom line for BHP Billion.

 

Investors seemed to be listening the RBA’s wishes and took the local dollar down to $0.9166 late Tuesday, from $0.9235 early and heights above $1.0500 as recently as April.

Interbank futures <0#YIB:> edged down as the market had priced in a modest one-in-five chance of a cut this week.

A Reuters poll of 23 analysts had found 21 expected a steady outcome, though many still tipped an easing later in the year.

Futures remain fully priced for a move to 2.5 per cent by October, while swap rates imply around 25 basis points of easing over the next 12 months.

Fortunately for policy makers, domestic inflation remains surprisingly well contained, so there should be plenty of room for further stimulus if needed.

Official inflation figures for the second quarter are due later this month and a benign outcome could clear the way for a rate cut in August.

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