Date
18 November 2019
Markets expect the Reserve Bank of Australia to cut rates again before year-end. Photo: Bloomberg
Markets expect the Reserve Bank of Australia to cut rates again before year-end. Photo: Bloomberg

Australia’s central bank holds rates

Australia’s central bank held rates at an all-time low of 1 percent on Tuesday as it weighed the impact of past easing, though markets are wagering the tide of policy stimulus sweeping the world will compel it to cut again before year-end, Reuters reports.

In truth, the Reserve Bank of Australia’s (RBA) quarter-point cuts in June and July have struggled to gain traction in the face of hard-pressed consumers at home and the pall of uncertainty cast by the Sino-US trade dispute.

RBA Governor Philip Lowe acknowledged there might be more to do after its monthly board meeting. Investors are far ahead of the bank in pricing in a cut to 0.75 percent by October, and 0.5 percent by early next year.

“The Board will continue to monitor developments in the labor market closely and ease monetary policy further if needed,” Lowe said.

He also attempted to enhance the effectiveness of easing by saying it was “reasonable to expect that an extended period of low interest rates will be required in Australia”.

This has been seen as a step toward forward guidance, a tactic used by many central banks to put downward pressure on both long-term borrowing costs and their currencies.

The ploy has had some success with Australia’s 10-year bond yield diving 21 basis points in just the past month to hit an historic trough of 0.993 percent.

The local currency has shed 1.2 percent in the same period to touch seven-month lows at US$0.6748, a huge boost to export earnings from resources which are priced in US dollars.

Trade boom

Data out Tuesday showed the country’s trade surplus ballooned to a record A$8 billion (US$5.43 billion) in June capping easily the best quarter on record for exports.

Australia likely even have enjoyed its first quarterly current account surplus since 1975, lessening its reliance on foreign funding at a time when markets are stressed.

The Aussie dollar has still taken collateral damage from the sudden flare-up in Sino-US trade tensions, with investors shorting the currency as a liquid proxy to hedge against China risk.

Beijing’s decision to allow its yuan to hit record lows threatens an outbreak of competitive currency depreciations worldwide, with Washington taking the drastic step of branding China a currency manipulator.

New Zealand’s central bank is considered certain to cut its rates on Wednesday if only to stop its currency from rising, while markets are now pricing in 115 basis points of easing from the Federal Reserve out to the end of next year.

Australia is fortunate in having the fiscal scope to juice the economy with the budget all but balanced and a relatively low level of government debt.

Booming resource exports have also pumped billions of extra dollars into tax receipts in recent months.

Lowe, himself, has broken with tradition by repeatedly calling for more spending on infrastructure and action on productivity-enhancing reforms.

So far, however, the conservative government of Prime Minister Scott Morrison has remained wedded to a political promise to push the budget into surplus, which would effectively tighten fiscal policy.

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CG