Australia's central bank shows it is ready to end easing
2014-02-06 10:53:28
The Reserve Bank of Australia has sent the clearest signals yet that it has finished cutting interest rates, as evidence piles up that the country's economy is responding to very cheap credit.
The bank's governor, Glenn Stevens, is also showing more restraint in talking down the Australian dollar, which he had repeatedly done as of late last year to help the country's resources and other exporters.
In its first policy decision for 2014, the RBA decided Tuesday to leave official interest rates at the record low of 2.5%. The central bank started to cut the key cash rate in November 2011 after it peaked at 4.75%.
More significantly, Stevens changed his language to suggest that any further rate reductions were unlikely. Economists believe this shift is important, and could point to potential increases in rates later this year.
In contrast to his previous statement from late 2013 that the board may "adjust policy as needed to foster sustainable growth," Stevens said in this latest statement that rates were unlikely to change anytime soon.
"On present indications, the most prudent course is likely to be a period of stability in interest rates," he said.
Subtle changes
Stevens was also less vocal about attempts to talk down the Australian dollar, which has weakened over recent months.
In December, Stevens shocked markets when he took the rare step of saying he would like to see an Australian exchange rate of about 85 U.S. cents to the Australian dollar. At the time, the Australian currency was trading at 90 cents.
But after the currency fell to 87 cents in recent weeks, Stevens removed a comment from his previous interest rate statement that the Australian dollar was "uncomfortably high."
"The exchange rate has declined further, which, if sustained, will assist in achieving balanced growth in the economy," he said this week.
The changes may seem subtle, but a growing number of economists believe they reflect a change of thinking at the RBA.
After all, inflation is rising faster than expected.
The Australian Bureau of Statistics said last month that the consumer price index rose 2.7% in the quarter ended December from a year earlier. This is close to the upper limit of the RBA's 2-3% target range.
Stevens noted that inflation was "higher than expected," a comment which may have been influenced by the weaker Australian dollar.
Other problems loom
John Peters, senior economist at the Commonwealth Bank, said that while the RBA's top concern late last year was weak growth, it now appears to be inflation. Peters also highlighted Stevens' comment that growth was likely to strengthen "beyond the short term."
"We believe the RBA will begin the process of monetary policy normalization commencing late in 2014," Peters said. "This will come in the form of a 0.25 percentage point hike in the cash rate to 2.75%."
Financial markets reacted to Stevens' comments by lifting the Australian dollar by more than 1 U.S. cent to 88.8 cents on Tuesday, and showing the belief that there is no chance of any further interest rate cuts.
Despite the signs of increased growth and inflation, however, other signs of softness remain.
Stevens was still cautious in his outlook for jobs, saying "demand for labor has remained weak."
The Australian economy lost 22,600 jobs in December and the unemployment rate remained at a four-year high of 5.8%.
Given these challenges, many economists say it may be a long time before Stevens is able to raise the cash rate.
Hans Kunnen, senior economist at St. George Bank, agreed with the RBA's broad view that there was "reason for optimism, but risks remain." He said interest rates may remain at 2.5% until as late as 2015.
"After that it could be time for rates to rise from their historically low level," Kunnen said.
The future path of monetary policy will always be debated, but Australian economists are in agreement about one thing: interest rates are unlikely to change anytime soon.