RBA may send clearer easing bias even as it holds rates

800px Reserve Bank of Australia   Canberra
800px Reserve Bank of Australia Canberra

The Reserve Bank of Australia (RBA) is considered almost certain to keep interest rates at a record low but it could try to talk down the local currency by clearly leaving the door open to more easing.

Image courtesy of [Reserve_Bank_of_Australia] \ WIkimedia Commons
All 23 economists polled by Reuters expect the central bank to hold the cash rate steady at 2.5%, given no material deterioration in the economy since the last cut in August.

A rebound of around 4% in the Australian dollar on a trade-weighted basis from a trough in August, however, would certainly have frustrated the bank. Barclays Capital analyst Kieran Davies said the rebound should be enough for the bank to caution about the currency in the October policy press release.

“This warning would likely express a strong preference for a lower exchange rate and could see the bank reinstate its explicit easing bias,” Davies said.

The RBA has repeatedly said it hopes to see the currency fall further in order to help stimulate other parts of the economy as the mining boom cools.

The bank now shifted to a wait-and-see stance recently saying there is already a lot of monetary stimulus in the economy, having slashed the cash rate by 225 basis points from late 2011.

The effects of low borrowing costs can clearly be seen in the housing market. In fact, record auction clearance in certain hot spots such as Sydney has gained a lot of media attention and even sparked talk of housing-bubble risk.

Both the central bank and the Australian government have tried to suppress the fears with Malcolm Edey, RBA assistant governor, describing them as “unrealistically alarmist”.

Data on Monday showed housing credit grew 4.7% in August from a year earlier, supporting Edey’s view. The growth was well below the heady 20%-plus pace seen in the early 2000s during a real estate boom.

Reuters says analysts suspect one more rate cut in coming months and the likely trigger could very well be a benign reading of third-quarter consumer inflation due late this month.

Annual inflation running at a 2.1% pace near the floor of the RBA’s long-term target band of 2 to 3% was also reported last month, suggesting that there will be room for further easing if needed.

Debt markets imply only a 6% chance of an October rate cut but are nearly fully priced for a quarter point cut by the first quarter of 2014.