Stevens flags rate cuts as economy dips

Reserve Bank governor Glenn Stevens has kept the door open for interest rate cuts in a dovish speech that has highlighted the challenges facing Australia as it tackles the end of the mining investment boom.

Reserve Bank governor Glenn Stevens has kept the door open for interest rate cuts in a dovish speech that has highlighted the challenges facing Australia as it tackles the end of the mining investment boom.

Mr Stevens' speech on economic policy after the resources and credit booms saw the Australian dollar fall more than US1¢ to below US91¢ on Tuesday. It was buying US90.64¢ late on Tuesday, almost US2¢ below its value the day before.

Financial markets were pricing in a near 90 per cent chance of a cut to the cash rate at the RBA's August board meeting next week, up from 76 per cent on Tuesday morning.

"We have been saying recently that the inflation outlook may afford some scope to ease policy further if needed to support demand. The recent inflation data do not appear to have shifted that assessment," Mr Stevens said about last week's second-quarter inflation figures.

The CPI data was mixed but still pointed to a subdued inflation level within the central bank's target band.

The Australian dollar and rate cut expectations had already taken a hit earlier on Tuesday when building approvals data for June came in weaker than expected.

Dwelling approvals fell by 6.9 per cent, missing consensus expectations of a 2 per cent rise, while the May figures were revised lower to minus 4.4 per cent. The March data, in contrast, was revised upwards from 9.5 to 13.1 per cent. Private sector approvals softened, falling 1.2 per cent for the month, but remain 9.9 per cent higher for the year. Private sector unit approvals slipped 12.6 per cent.

HSBC's chief economist for Australia, Paul Bloxham, called Mr Stevens' speech downbeat and said it "marked the first occasion when the RBA seems to have declared that mining investment is now past its peak".

TD Securities' head of Asia-Pacific Research, Annette Beacher, moved forward her forecast for a November cut to next week on the back of Mr Stevens' acknowledgment that the gap left by a fall in mining investment was not being sufficiently filled by growth in the non-mining sectors.

Mr Stevens said while "Australians will continue to benefit from the higher level of resources output for a very long time", the end of the investment phase of the resources boom would be "quite a challenging time".

He noted that business capital spending outside the mining sector, as well as housing investment, remained subdued and there was "ample scope for both to rise". "A stronger trend in non-resources business investment looks like it is a while off yet," he added.

Mr Stevens said he would not be surprised if the Australian dollar declined further, but he did not expect the weakening currency to have a major impact on inflation unless it experienced a "very large depreciation".

The RBA governor was also confident further monetary policy easing would continue to stimulate the economy and that he was not "running out of ammunition in the near-term".

Mr Stevens said despite global fears on China's slowing economy, it was still delivering what policymakers wanted, a shift towards GDP figures of about 7 per cent. He said the key concern was instead on how the Chinese government managed its shadow banking sector, home to non-traditional forms of lending.



What the governor is thinking

Additional cuts to the cash rate would provide a stimulus to demand.

The Reserve Bank is not overly concerned about the prospect of asset bubbles.

A lower Australian dollar would not pose a significant risk to the inflation outlook.

China still expected to grow at a robust pace but the market needs to adjust to lower rates of growth.

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