Australian central bank keeps rates at 2.5% as mining fades
June 4, 2014, 12:00 am TWN
SYDNEY--Australia's central bank on Tuesday left interest rates on hold at a record low 2.5 percent as it sounded a cautiously optimistic note on the economy's transition away from mining-led growth.
The Reserve Bank (RBA) continued to flag a period of unchanged rates in a statement that balanced a more positive outlook for the labor market and for firms' spending plans with a warning that a sharp fall-off in mining investment was still to come.
"In the board's judgment, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target," Governor Glenn Stevens said.
"On present indications, the most prudent course is likely to be a period of stability in interest rates."
It was the ninth-consecutive board meeting where rates remained on hold.
The Australian dollar was largely unchanged following the decision, which was widely expected by economists and financial markets.
The central bank noted that the Australian dollar "remains high by historical standards," and said its strength over the past few months was more significant given the recent decline in commodity prices.
The drop in iron ore prices to below US$100 per tonne has seen Australian producers signal possible cuts to spending.
Deutsche Bank economist Phil O'Donoghue said while the remarks about the exchange rate were notable, there were no signs in the statement of a shift in the central bank's outlook.
"The RBA I suspect are of the belief that they won't be changing the cash rate for some time yet," he said.
The Reserve Bank did not change its commentary on fiscal spending despite fears the May budget could hit consumer confidence amid its harsh cuts to welfare and other government expenditure, only noting that it was "scheduled to be subdued."
But it cautioned that while economic growth — which remains below a trend rate of about 3.0 percent — had firmed this year on the back of a sharp lift in mining exports, such increases would likely become smaller over the next few quarters.
Official data on Tuesday showed the country's current account deficit shrank to AU$5.67 billion (US$5.24 billion) from AU$11.7 billion in the December quarter as shipments of iron ore and coal — Australia's biggest exports — grew.
It followed figures last week showing spending plans for Australian firms revised higher, even as corporate investment for the first quarter slipped.
Barclays' chief economist for Australia Kieran Davies said more concrete signs of a pick-up in spending by non-mining firms and an improvement in the labor market would be central to any Reserve Bank decision to move away from its current neutral stance.
"The third factor is that while the RBA is not as vocal (about the currency) as they have been over the past year, I imagine if the Aussie dollar resumes falling — that would be important for them as well," Davies said.