Economy Dollar up as RBA shifts footing on outlook
The Reserve Bank has surprised financial markets by shifting to a less dovish stance even as it cut interest rates to help stimulate an economy adjusting to the end of the resources boom.
The RBA eased the cash rate by 25 basis points to 2.5 per cent on Tuesday, the first time in an election cycle the central bank has cut rates since it started publishing an official cash rate more than two decades ago.
The Australian dollar jumped half a cent to US89.71¢, with markets interpreting Reserve Bank governor Glenn Stevens' statement as a move towards a neutral bias on rates. It was buying US89.9¢ late on Tuesday.
Banks were quick to pass on the cut in full, bringing down mortgage rates to their lowest levels since the financial crisis. Even after Tuesday's cut Australia has some of the highest cash rates among the developed world.
"In Australia, the economy has been growing a bit below trend over the past year. This is expected to continue in the near term as the economy adjusts to lower levels of mining investment," Mr Stevens said of the cut, which was widely expected in markets.
Even so analysts narrowed in on comments that were missing in Tuesday's statement, which suggested the rate-cutting cycle may be coming to an end.
Previous monthly statements by the governor had noted the outlook for inflation may "provide some scope for further easing", but Tuesday's statement was silent on this issue.
Analysts said the Reserve Bank appeared to shift back to a wait-and-see mode, with further moves likely to be data dependent.
"The case for the next rate cut - should there be one - needs to be built from scratch," Deutsche Bank's chief economist Adam Boyton said.
"The lack of any forward guidance in the final paragraph has us concluding the statement is a little less dovish than the market might have been expecting."
ANZ's chief economist for Australia, Ivan Colhoun, said the statement was "an evolution of recent thinking rather than a revolution", with markets set to analyse the RBA's statement on monetary policy, to be released on Friday, for further guidance on the central bank's outlook.
The rate cut came as ANZ's latest job advertisements series found job ads had fallen for the fifth straight month in July, another sign of a weakening labour market. Job ads were 8 per cent lower than at the start of the decline in February.
The soft forward indicator for employment comes two days before the Australian Bureau of Statistics releases its jobless rate for July. Economists forecast an unemployment rate rise of 0.1 percentage points to 5.8 per cent. The RBA's less dovish bias, coupled with a federal election on September 7, meant another cut at the board's next meeting on September 3 was unlikely unless there was a sharp deterioration in the economy, analysts said.
"We are of the view that today's cut could be the last for this easing phase, as the lower Australian dollar is doing a lot of the work for the RBA already and is also an upside risk to the inflation outlook," HSBC chief economist for Australia Paul Bloxham said.
UBS chief economist Scott Haslem said while he expected the RBA to remain on hold for several months in a data-watching mode, there was "little doubt in our minds that the RBA retains an easing bias, given the rising trend in unemployment and an Australian dollar that is still seen to be high.
"If we don't see some improvement in the leading indicators of the economy, such as job ads and business conditions - or the Australian dollar sustains a move higher again - the RBA will likely have some further work to do either late this year or early 2014."
The Australian dollar could recover to trade within the range of US90¢ to US93¢ as financial markets unwind their expectations of further near-term cuts, RBS senior currency strategist Greg Gibbs said after Tuesday's currency bounce.
"The RBA is back in watch-and-wait mode. They would like to keep the Australian dollar low, but probably understand that cutting rates too quickly, such that it projects a bottom is close, will be counterproductive," he said.