Australia saw ‘no need’ for rate cut at July meeting
SYDNEY, July 17 — Australia's central bank saw “no need” to cut interest rates at its July meeting because a material easing had already been delivered and data showed the domestic economy had more momentum than first thought.
Yet minutes of the Reserve Bank of Australia's (RBA) July 3 meeting, released today, also showed board members believed it was right for policy to remain stimulative.
“Members continued to view it as appropriate for interest rates to be a little below average given evidence of slower global growth and the low rate of inflation in Australia,” the minutes said.
“But with a material easing in monetary policy having occurred over the preceding six months or so, and with recent signs that the domestic economy had a little more momentum than had earlier been indicated, members saw no need for any further adjustment to the cash rate at this meeting.”
The Australian dollar touched a session high near $1.0300 in the wake of the minutes, versus $1.0248 at its New York close, as markets grew less confident of a rate cut next month.
Interbank futures <0#YIB:> implied a less than 50/50 chance of a move in August, down from 60 per cent last week.
“The RBA's July meeting minutes suggest the Board may be inclined to pause and assess the impact of earlier policy easing before cutting rates further,” said Alvin Pontoh, strategist at TD Securities.
Loans picking up again
The RBA kept the cash rate steady at 3.5 per cent at the July meeting, following back-to-back cuts and having eased by a 125 basis points since November.
The average interest rates on outstanding housing loans was now about 50 to 60 basis points below the post-1996 average, while business loans were 50 and 75 basis points lower, the minutes said.
This appeared to be encouraging firms to borrow again and the RBA said it has observed a noticeable pick up in business credit over the past four months after a long period of weakness.
Highlighting a familiar theme, policymakers noted that mining investment had been a little stronger than expected, but much of the non-resource sector remained subdued, particularly those struggling with a high dollar.
Importantly, members felt that inflationary pressure overall remained contained, in part due to the strong dollar and a softening in global prices, particularly for oil and other commodities.
The RBA said while first-quarter growth was faster than expected, other timely indicators including consumer and business sentiment suggested the economy likely slowed to around trend pace in the second quarter.
The economy grew a surprisingly strong 1.3 per cent in the first quarter, with annual growth up at 4.3 per cent.
Second-quarter gross domestic product data is not due until September 5.
Europe still a worry
On China, Australia's single largest export market, the RBA said exports had continued to grow after softness through most of 2011.
“Members noted that a number of indicators suggested that growth in the domestic activity in China may not be slowing much further, although the outlook remained uncertain,” the minutes said.
But the RBA warned that Europe remained a substantial risk, saying the situation there could deteriorate again and spill over to other economies. Growth in the United States had also slowed, which all pointed to a weaker global outlook.
That is one reason why financial markets are betting on still more rate cuts. Interbank futures <0#YIB:> have factored in around 100 basis points worth of easing over the next 12 months.
Many analysts, however, expect only one or two more moves by the central bank this year, and see the cash rate bottoming out at 3.00-3.25 per cent.
“For now, we leave our August rate cut forecast intact, though we continue to acknowledge the risk of a delay. Consensus has shifted from 100 per cent to 50-50 chance of a rate cut, in line with OIS market pricing,” TD Securities' Pontoh added. — Reuters