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Australia Holds Rate as Currency Eases China-led Commodity Rout


Tuesday, 6 October 2015 11:08 WIB

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Australia left interest rates unchanged Tuesday as the local dollar recorded the biggest drop among major currencies last quarter, cushioning the impact of lower commodity prices and a weaker outlook in key trading partner China.

Reserve Bank of Australia Governor Glenn Stevens and his board kept the cash rate at a record-low 2 percent, as predicted by markets and economists, following reductions in May and February. The currency dropped almost 9 percent in the June-September period.

Australia has so far had little success in stimulating industries with rate cuts as a decade-long mining investment boom unwinds. Businesses plan to cut investment by 23 percent this fiscal year as firms decide they can meet demand from heavily indebted households with existing capacity.

China slowdown has intensified pressure on the government to overhaul the tax system and labor market and boost competition to improve productivity and generate growth. The ousting of change-averse Prime Minister Tony Abbott in favor of Malcolm Turnbull, who declared he would provide the economic vision and leadership the country needed, may herald the beginning of a reform drive.

Traders are pricing in a 30 percent chance of another rate cut by November as Australia, the developed world most China-dependent economy, struggles to cope with slumping prices for key resource exports.

Yet the country labor market has remained relatively resilient, aided by weaker wages growth. Unemployment was 6.2 percent in August as more than 17,000 jobs were added.

Similar to the U.S., debate is intensifying Down Under on whether potential growth is lower than earlier thought. Australia economy expanded 2 percent in the second quarter from a year earlier and has grown at below its average rate for six of the past seven years.

Australia medium-term potential growth is likely to be around 2.5 percent compared with 3.25 percent in the past, the International Monetary Fund said in a report last week. The RBA monetary policy is “appropriately accommodative and could be eased further if the cyclical rebound disappoints, provided financial risks remain contained,” IMF executive directors said in a Sept. 30 statement.

Source : Bloomberg


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