Australia’s central bank holds rates, tempers call for A$ fall

Wednesday, 5 August 2015 00:00 - - {{hitsCtrl.values.hits}}

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Australia’s central bank held interest rates at record lows on Tuesday in a widely expected decision, but surprised markets by toning down calls for a further fall in the local dollar.

The currency jumped half a U.S. cent to $0.7348 after the Reserve Bank of Australia (RBA) dropped a reference to a further decline being necessary, saying only that the Aussie was adjusting to weak commodity prices.

The statement following its monthly policy meeting seemed to mark a new phase in a long campaign to talk down the currency, which hit a six-year low last week.

“It suggests maybe the Aussie is closer to appropriate levels,” said Su-Lin Ong, a senior economist at RBC Capital Markets.

“It also suggests that the easing bias, which was already pretty modest, is very mild,” she added. “Part of the rationale around having an easing bias and threatening to cut, is to get your currency lower.”

Investors reacted by lengthening the odds of a further cut in the 2% cash rate with interbank futures now implying a 60 percent chance of a move by December, from 72% earlier in the day.

RBA Governor Glenn Stevens has recently sounded reluctant to cut again as he balances the need to underpin a sluggish economy against the risk of over stimulating an already hot housing market.

The central bank has already eased twice this year as the unwinding of a once-in-a-century mining boom hammered business investment and national income.