Aussie $ rises after central bank leaves rates on hold

SYDNEY • Australia's dollar extended its recent gains after the central bank kept the nation's benchmark rate at a record low and said prospects for economic improvement had "firmed", prompting traders to bet policy will remain on hold until next year.

The Aussie rose for a third day against the US dollar as a rally in emerging-market stocks encouraged investors to buy other higher-yielding assets. The Reserve Bank of Australia (RBA) surprised some who were anticipating a reduction in the 2 per cent main rate, said portfolio manager Tamar Hamlyn, at Ardea Investment Management.

"A lot of people had been expecting a cut," Mr Hamlyn said.

However, he added that "the outlook for activity, if anything, has improved in recent months".

"So that obviously would be quite inconsistent with easing policy. Expectations are for them to be on hold for the immediate future."

The Australian dollar rose 0.5 per cent to 71.81 US cents as of 9.31 am in London, after climbing 1 per cent in the previous two days. It was trading at 99.56 cents against the Singapore dollar. The Australian dollar has declined 17 per cent in the past year, boosting the competitiveness of local industries.

RBA governor Glenn Stevens and his board kept the cash rate at a record-low 2 per cent yesterday.

"The board judged that the prospects for an improvement in economic conditions had firmed a little over recent months and that leaving the cash rate unchanged was appropriate," Mr Stevens said in a statement accompanying the RBA decision.

"Members also observed that the outlook for inflation may afford scope for further easing of policy, should that be appropriate to lend support to demand."

Swaps markets see a 67 per cent chance that the RBA holds policy unchanged next month, and a better than 70 per cent chance of a reduction in the first quarter of 2016.

"The easing bias is clear," said Ms Su-Lin Ong, head of Australian economic and fixed-income strategy at Royal Bank of Canada who forecasts a rate cut in the first quarter of next year.

"But the onus is very much on the activity data to deteriorate" for the bias to be acted upon.

While a weaker Aussie helps local producers, some companies are still having to retrench staff to keep themselves viable.

The economy has grown at below its average for six of the past seven years.

"Inflation is low and should remain so, with the economy likely to have a degree of spare capacity for some time yet," Mr Stevens said.

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A version of this article appeared in the print edition of The Straits Times on November 04, 2015, with the headline 'Aussie $ rises after central bank leaves rates on hold'. Print Edition | Subscribe