Australia holds rate after its currency eases on China-led commodity rout

Australian and Chinese banknotes. Australia left interest rates unchanged on Tuesday (Oct 6) as the local dollar recorded the biggest drop among major currencies last quarter, cushioning the impact of a weaker outlook in China.
Australian and Chinese banknotes. Australia left interest rates unchanged on Tuesday (Oct 6) as the local dollar recorded the biggest drop among major currencies last quarter, cushioning the impact of a weaker outlook in China. PHOTO: BLOOMBERG

SYDNEY (BLOOMBERG) - Australia left interest rates unchanged on Tuesday (Oct 6) as the local dollar recorded the biggest drop among major currencies last quarter, cushioning the impact of lower commodity prices and a weaker outlook in key trading partner China.

Reserve Bank of Australia Governor Glenn Stevens and his board kept the cash rate at a record-low 2 per cent, as predicted by markets and economists, following reductions in May and February. The currency dropped almost 9 per cent in the June- September period.

The weaker Aussie "is loosening financial conditions and supporting growth," Paul Bloxham, chief Australia economist at HSBC Holdings, who previously worked at the central bank, said before the decision was announced. "With the Australian dollar doing the work for them, we expect the RBA to be reluctant to cut rates further, despite the slowdown in China."

The Aussie dollar advanced after RBA held rates for a fifth- straight month, climbing to 70.99 US cents as of 2:33 pm in Sydney, from about 70.85 just before the decision. The currency dropped to a six-year nadir of 68.96 cents on Sept 7, before climbing to a one-month high of 72.80 on Sept 18.

Australia has so far had little success in stimulating industries with rate cuts as a decade-long mining investment boom unwinds. Businesses plan to cut investment by 23 per cent this fiscal year as firms decide they can meet demand from heavily indebted households with existing capacity.

China's slowdown has intensified pressure on the government to overhaul the tax system and labor market and boost competition to improve productivity and generate growth. The ousting of change-averse Prime Minister Tony Abbott in favor of Malcolm Turnbull, who declared he would provide the economic vision and leadership the country needed, may herald the beginning of a reform drive.

One area where cheap borrowing costs have worked is the property market: prices in Sydney have soared and Stevens has described parts of the market as "crazy." Traders are pricing in a 30 per cent chance of another rate cut by November as Australia, the developed world's most China-dependent economy, struggles to cope with slumping prices for key resource exports.

Yet the country's labour market has remained relatively resilient, aided by weaker wages growth. Unemployment was 6.2 per cent in August as more than 17,000 jobs were added.

Similar to the US, debate is intensifying Down Under on whether potential growth is lower than earlier thought. Australia's economy expanded 2 per cent in the second quarter from a year earlier and has grown at below its average rate for six of the past seven years.

Australia's medium-term potential growth is likely to be around 2.5 per cent compared with 3.25 per cent in the past, the International Monetary Fund said in a report last week. The RBA's monetary policy is "appropriately accommodative and could be eased further if the cyclical rebound disappoints, provided financial risks remain contained," IMF executive directors said in a Sept 30 statement.