Australia kept interest rates at a record low Tuesday, as it has for the past two years, while a currency sliding toward 70 U.S. cents offers the prospect of additional stimulus for the economy.
As expected, Reserve Bank Governor Philip Lowe left the cash rate at 1.5 percent, a stance he expects will eventually tighten the labor market and spur enough wage growth to speed up inflation. While the Aussie dollar’s more than 10 percent drop since February may help quicken that process, there’s a risk that rising mortgage rates and falling property prices could encourage households to put away their wallets.
The local dollar advanced, trading at 72.14 U.S. cents at 2:36 p.m. in Sydney from 71.91 prior to the release. On the Aussie, the governor noted “it has depreciated against the U.S. dollar along with most other currencies.”
The RBA has said its next rate move is more likely to be up than down; the governor, since taking the helm in September 2016, has been reluctant to cut further given the diminishing returns from easier policy. Yet the RBA’s stimulus was eroded somewhat when Westpac Banking Corp. last week said it was hiking its key mortgage rate by 14 basis points, more than half a typical RBA increase, to compensate for higher offshore funding costs.
That prompted traders to push out their bets for the central bank’s first rate hike since 2010 and drive down the currency. Many analysts now see the Aussie dropping into the 60s, potentially boosting the competitiveness of exporters and import-competing industries and allowing them to take on more staff.
Source : Bloomberg