The
Australian dollar fell half of a U.S. cent as the market had not been fully
priced for a move, with many analysts favoring November as the more likely
window for a cut.
“The Board judged that, on the back of
international developments, the growth outlook for next year looked a little
weaker,” Reserve Bank of Australia (RBA) Governor Glenn Stevens said after the
central bank’s monthly policy meeting.
“The
Board therefore decided that it was appropriate for the stance of monetary
policy to be a little more accommodative.”
The
latest move brings the cuts delivered since last November to 150 basis points.
Investors had priced in about a 60 per cent probability on an easing this week,
in part due to concerns about China, Australia’s biggest export market.
Most
economists had thought the central bank would wait for third-quarter inflation
figures due later this month before pulling the trigger.
Still,
with core inflation expected to remain near the floor of the RBA’s long-term
target band of 2 to 3 per cent, markets had assumed further easing was
inevitable.
“I
think they have done the right thing,” said Shane Oliver, head of investment
strategy at AMP Capital Investors. “The global economy is looking a bit shaky.”
“We
are looking to another 0.25 per cent cut in November, and then another one in
February or March next year, taking the cash rate to 2.75 per cent.”
Interbank
futures are fully priced for a move to 3.00 per cent by Christmas. Overnight
indexed swaps, which show where the market thinks the cash rate will be over
time, have 2.75 per cent inked in on a 12-month horizon.
Yields
on Australian 10-year bonds are under 3 per cent, so it is cheaper for the
government to borrow for a decade than for banks to borrow overnight.
Australia
is fortunate is still having plenty of room to cut. With rates near zero in the
United States, Japan and U.K., those countries have had to take ever more
exotic stimulus measures by buying massive amounts of government debt.
The
easing already delivered helped the resource-rich economy grow a robust 3.7 per
cent in the year to June, far outpacing its developed world peers. With annual
output up at A$1.47-trillion ($1.5-trillion U.S.), it should pass Spain as the
world’s 12th largest economy this year.
Yet
global headwinds have only got greater as the cooling of China and a recession
in Europe drag on world trade. The pain is being felt across Asia, leading the
central bank of South Korea on Tuesday to shift its policy emphasis toward
promoting growth.
Prices
for iron ore and coal, Australia’s two largest export earners, have taken a
beating in recent months, leading some miners to scale back on ambitious
expansion plans.
The
RBA’s Stevens conceded the outlook for mining, while still very strong, had
cooled a little.
“The
peak in resource investment is likely to occur next year, and may be at a lower
level than earlier expected,” he wrote. “As this peak approaches it will be
important that the forecast strengthening in some other components of demand
starts to occur.”
This
transition has been complicated by the stubborn strength of the local currency
which is pressuring sectors such as manufacturing and tourism.
A
dash of monetary largesse would also help offset a coming tightening in fiscal
policy as the Labor government is wedded to returning the budget to surplus by
next June, years if not decades before most other developed nations.
“They’re
looking for the non-mining part of the economy to start making a greater
contribution a bit sooner and lower rates are one way to assist that growth
transition,” said Michael Blythe, chief economist at Commonwealth Bank.
“November
looks a real possibility for another cut, particularly, if we get another
friendly-looking inflation number (due out on Oct. 24).”
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