SYDNEY, July 16: Australia’s central bank said a steep fall in the local dollar would add a little to inflation over time, but not to the extent that it would hamper another cut to interest rates if needed to support demand.
Minutes of its July 2 policy meeting, showed the Board of the Reserve Bank of Australia (RBA) generally welcomed the drop in the currency and felt it was possible it could fall further.
‘Given the exchange rate adjustment that was occurring, and with the substantial degree of monetary stimulus already in place, members assess the current stance of policy to be appropriate for the time being,’ the minutes revealed.
‘The Board also judged that the inflation outlook, although slightly higher because of the exchange rate depreciation, could still provide some scope for further easing, should that be required to support demand.’
The RBA held the cash rate steady at a record low 2.75 percent in July, having delivered a cut in May. Markets are currently wagering there is a better than evens chance it will cut to 2.5 percent in August.
This month’s rate decision was made against a backdrop of a weakening local dollar, which has fallen around 15 percent since mid-April to three-year lows near 90 U.S. cents. On a trade-weighted basis, the Aussie has slid around 12 percent to three-year lows as well.
The decline in the currency would have come as a welcome relief for many exporters struggling to boost competitiveness in a tough global market. It should also help smooth the economy’s transition from mining-led growth as the long-boom in resource investments finally crests.
Despite the dollar’s fall, Board members still felt that it was at a ‘high level’.
‘Members noted that it was possible that the exchange rate would depreciate further over time as the terms of trade and mining investment declined, which would help foster a rebalancing of growth in the economy,’ the minutes said.
Underscoring a still dovish leaning, the RBA said the overall economy was continuing to grow at a below potential pace and the outlook for business investment remained uncertain.
While it expected mining investment to remain high for some quarters, it saw a more rapid fall further out due to a significant decline in planning and development work that is a precondition for new projects.
On the non-mining business sector, the RBA said near term indicators still suggested subdued growth, although the weaker exchange rate should provide more support for the tradable sector.
Members also noted that the low interest rates were starting to spur parts of the economy, particularly the housing market, and saw further growth in home building.
On China, Australia’s single biggest export market, the RBA said recent data pointed to steady growth but noted there was some tightening in the Chinese interbank market to help rein in the pace of credit growth.
It cautioned that it was too early to tell how long the tightening in financial conditions would be sustained and what its effect on borrowing and economic activity might be. (agencies)
Trending Now
E-Paper
Follow our WhatsApp channel