RBA Keeps Rate-Cut on Cards to Shield Aussie From Global Easing

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Australia's central bank chief Philip Lowe is leaving open the door to further interest-rate cuts in order to prevent a wave of global easing from neutralizing his back-to-back reductions and boosting the currency.

The Reserve Bank is set to keep the cash rate at a record-low 1% Tuesday, traders and economists predict, following June and July's cuts. Lowe will want to see how these filter through the economy -- particularly with a stabilizing property market -- but will be mindful of keeping a leash on the Aussie dollar after the U.S. eased last week and New Zealand is expected to on Wednesday.

“The RBA is part of the global easing cycle and the currency is part of policy deliberation,” said Su-Lin Ong, head of economic and fixed-income strategy at Royal Bank of Canada in Sydney, who sees the cash rate at 0.5% next year. “If global easing intensifies -- trade goes pear-shaped or whatever -- then the RBA will be part of that because of a desire to keep the currency lower.”

Australia's small, open economy is sometimes viewed as a canary in the global coal mine as shifts in international sentiment show up quickly Down Under. President Donald Trump's decision to impose additional tariffs on China last week suggests the Federal Reserve is likely to have to cut rates further to protect the U.S. economy, ramping up pressure on Lowe to follow suit.

Outside of the world's travails, Australia's economy has slowed sharply in recent quarters as a prolonged period of weak wage growth finally compels households to put away their wallets. A private gauge of the services industry Monday showed activity at its weakest level in almost five years.

Data last week showed that core inflation hasn't reached the RBA's target for more than three years, and even hiring that's been a consistent bright spot is showing signs of cooling.

The RBA estimates unemployment can fall to 4.5% from the current 5.2% before labor scarcity starts fueling inflation, Lowe said when explaining the two recent cuts. It's also wagering that a combination of rate reductions, tax cuts and looser lending rules is likely to return life back to the property market, where prices rose in July for the first time in almost two years.

Roller Coaster

Meantime, after several years of dragging on GDP, mining investment is likely to support the economy next year as firms refurbish existing sites. But outside of the housing market and exports booming due to iron ore supply disruptions, economic data has mainly been weak. Then there's the rest of the world, which has been on another roller-coaster ride in the last seven days.

“It's been an interesting week,” RBC's Ong said Friday. “The Fed delivered a hawkish cut and maybe that took some of the pressure off the RBA. Then obviously Trump kyboshed all of that. You'd have to think the risks of more Fed easing are higher now than they were 48 hours ago and the RBA will need to respond.”

Lowe will get a chance to expand on his thinking on Friday, in a semi-annual testimony before a panel of lawmakers in Canberra. The central bank releases its quarterly update of growth and inflation forecasts the same day.

--With assistance from Garfield Reynolds and Tomoko Sato.

To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Chris Bourke

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