Australia leaves rates unchanged as falling Aussie dollar cushions China-led commodity drop

A man stops to look at the electronic share board at the Australian Stock Exchange (ASX) in Sydney, Australia on Aug 24, 2015.
A man stops to look at the electronic share board at the Australian Stock Exchange (ASX) in Sydney, Australia on Aug 24, 2015.PHOTO: EPA

SYDNEY (BLOOMBERG) - Australia left interest rates unchanged Tuesday (Sept 1) as a declining currency cushions the impact of lower commodity prices and a weaker outlook for 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 has dropped more than 2 US cents since the last meeting.

"We think the hurdle for rate cuts is still a high one," Alex Joiner, chief economist for Australia at Bank of America Merrill Lynch, said before the release. On the currency, "the RBA has softened its language in this space," no longer referring to further depreciation as likely or necessary, he said.

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 percent this fiscal year as firms decide they can meet demand from heavily indebted households with existing capacity.

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 50-50 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.

China devalued its currency Aug 11, and a day later reported industrial production, investment and retail data that trailed analysts' estimates. After China's stock market recorded the steepest falls since 1996, policy makers Aug 25 cut benchmark lending and saving rates for the fifth time since November 2014 and lowered banks' required reserve ratio by half a percentage point.

Yet Australia's labor market has remained relatively resilient, aided by weaker wages growth, with unemployment at 6.3 per cent in July as more people entered the workforce.

Similar to the US, debate is intensifying Down Under on whether potential growth is lower than earlier thought, which would help explain the stabilizing labor market. A reduced speed limit from the RBA would ease pressure to cut rates. Economists predicted Australia's economy expanded 2.2 per cent in the second quarter from a year earlier ahead of data due out Wednesday.

"Growth rates have mostly started with a '2' for a while now - despite the lowest interest rates in our lifetimes," Mr Stevens said in remarks last week. "It may be about changing demographics. It may be that potential growth is a bit lower than we used to think - though I don't think we can know whether that is so at present."