Dollar rises as RBA minutes show further rate cut unlikely
The Reserve Bank has signalled a wait-and-see approach to future rate cuts amid tentative signs of improving economic indicators and despite the recent strength in the Australian dollar.
The RBA said it would keep a close eye on economic data over the coming months to determine the success of the current easing cycle, the minutes of the October meeting released on Tuesday showed.
"The board's judgment was that, given the substantial degree of policy stimulus that had been imparted, it would be prudent to leave the cash rate at the existing low level while continuing to gauge the effects," the minutes reported.
"Members agreed that the bank should again neither close off the possibility of reducing rates further nor signal an imminent intention to reduce them."
The Australian dollar hit a four-month high against several currencies after the RBA's comments reduced the likelihood of a near-term easing, and as prospects of a US budget and debt ceiling deal rose.
The currency rose more than half a cent above its Tuesday low of US94.78¢. It was buying US95.32¢ in late trade.
"By not extinguishing the possibility of further rate cuts, the RBA can support confidence and not be accused of lifting currency expectations," Citi economists Josh Williamson and Paul Brennan said of the minutes.
"But by not encouraging a belief of further imminent rate cuts, it avoids supercharging the housing market, which is red hot."
The board noted the rise in house prices and housing turnover, as well as indicators that credit growth, and dwelling investment and construction could continue to improve later this year.
It said the "effect of low interest rates was evident across a range of indicators and had further to run" but also acknowledged the below-trend pace of economic growth.
The minutes were light on forward guidance. The RBA noticeably left out previous comments that expressed a desire for a lower exchange rate to support a rebalancing of the economy towards non-resources-led growth. Analysts said it signalled the RBA's acceptance of the current — and potentially temporary — elevated levels of the dollar, as the stimulatory effects of previous rate cuts flowed into the housing sector and the broader economy.
"With a little bit more buoyancy in the domestic landscape as well as the regional landscape, a high Australian dollar for the RBA isn't as problematic as a high dollar in a situation where the economic indicators are turning down," HSBC's head of Australian foreign-exchange sales, Paul Edwards, said.
The minutes touched on the continued weakness in the labour market, with jobs demand remaining soft, in part due to the decline in employment intentions in mining and mining-related industries.
At the same time, the board said it had "become more evident" that the mining boom was shifting away from investment towards production.
After the RBA decided to keep rates on hold in October and shift towards a more neutral monetary policy stance, some economists shifted back their expectations of another rate cut to February 2014.