Australia's central bank bucks global easing trend, holds rates

A pedestrian walks past the Reserve Bank of Australia in Sydney.
A pedestrian walks past the Reserve Bank of Australia in Sydney. PHOTO: BLOOMBERG

SYDNEY (REUTERS) - Australia's central bank stared down global headwinds and kept interest rates steady for a tenth month on Tuesday (March 1), even as surprisingly soft data suggested the domestic economy hit an air pocket at the end of last year.

While central banks from China to Japan are going for ever more stimulus, the Reserve Bank of Australia (RBA) held rates at 2 per cent at its March meeting.

The prospect of a further easing was left on the table, but a virtually unchanged statement showed little inclination to act.

"The Board judged that there were reasonable prospects for continued growth in the economy," RBA Governor Glenn Stevens said in a brief statement. "Continued low inflation would provide scope for easier policy, should that be appropriate to lend support to demand."

In a Reuters poll of 40 analysts, all but one had expected no change in the cash rate this week which limited the reaction in markets to a slight rise in the local dollar.

Mr Stevens again noted that the central bank was watching if the labour market could sustain its strength or whether wild swings in global markets would have a lasting impact, but left the questions open.

Since last easing in May, the central bank has shown a clear preference for further stimulus to come through a low currency.

Central banks world wide are keen to keep their currencies competitive as they take ever more aggressive steps to revive growth.

The Bank of Japan recently stunned markets by taking rates negative; China eased liquidity constraints on Monday and the European Central Bank is thought almost certain to expand its asset buying campaign at a meeting next week.

As a result, the local dollar at US$0.7132 is holding well above the US$0.6828 lows touched in January.

That is one reason investors are still wagering on at least one more rate cut, with interbank futures fully priced for 1.75 per cent by August.

"We suspect the RBA will become disheartened by further shifts towards lower and negative cash rates globally, giving rise to increased risk that the AUD trades above levels which it sees as fair," said Andrew Ticehurst, an economist at Nomura. "We continue to look for a 25 basis points cut in May."

Australian data out on Tuesday seemed to add to the case for an eventual easing. Net exports added nothing to gross domestic product (GDP) last quarter when analysts had looked for a contribution of around 0.3 percentage points.

That left analysts forecasting a rise of around 0.4 per cent in GDP last quarter, less than half the gain made in the third quarter. Annual growth is seen stuck at 2.5 per cent, better than most of the rich world but substandard for Australia.