The Reserve Bank of Australia (RBA) in Sydney, Australia, 01 September 2015. The RBA announced it will keep interest rates on hold at an historic low of two percent. The Australian bond market has been weighed down by a spike in oil prices, nervousness about China's pace of growth and fears of a September US rate rise. EPA
ADELAIDE: A top Australian central banker gave a clear signal on Friday that interest rates in the country were set to remain at record lows for a while yet, wrong-footing hawks and sending the local currency sliding from a two-year peak.
Reserve Bank of Australia (RBA) deputy governor Guy Debelle, speaking at an event in Adelaide, quashed talk of domestic interest rate hikes which had gathered momentum after the Bank of Canada increased its policy rate to 0.75% last week.
“Just as the policy rate in Australia did not need to decline to the very low levels seen in other parts of the world, the fact that other central banks increase their policy rates does not automatically mean that the policy rate here needs to increase,” he said.
The Australian dollar, which was perched near a two-year peak of US$0.7992, sunk almost 1% to as low as US$0.7875 as markets recalibrated their positions following Debelle’s comments.
The speculation of a turn in Australian monetary policy had been further fuelled after the RBA’s minutes of July policy meeting revealed board members had discussed the neutral rate of interest - that which neither stimulates nor retards the economy.
But Debelle emphasised that the recent outbreak of hawkishness by policymakers in the Western world does not automatically mean that interest rates need to rise in Australia.
“Debelle has clearly taken the opportunity to hose down interest rate expectations for a rate rise and take some of the heat out of the currency,” said Kristina Clifton, an economist at the Commonwealth Bank of Australia. “We don’t yet see a case for rate rises sooner than late 2018.”
Market attention now turns to second-quarter inflation data followed by governor Philip Lowe’s speech next Wednesday.
The deputy governor said the resurgent Aussie was complicating the economy’s transition following the end of a decade-long mining investment boom.
A rising local currency could ”counteract” the benefits of low cash rates and faster global growth, he said.
“While an easier monetary policy elsewhere in the world should lead to faster growth in the world economy, which is good for the Australian economy, an appreciating exchange rate works against this.”
Debelle also talked at length about the neutral policy interest rate which the RBA sees at 3.5% compared to the record low 1.50% for official cash rate.
The discussion around neutral rates at its policy meeting this month was interpreted by some in the market as a hawkish message, a conclusion that Debelle rejected.
He said the policy rate in Australia was low because the neutral rate was lower than it used to be, meaning the current policy setting was not as expansionary as a 1.50% cash rate would have been in 1990s or early 2000s. “No significance should be read into the fact the neutral rate was discussed at this particular meeting.” - Reuters
Limited time offer:
Just RM5 per month.
