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Australia's central bank sees low for longer rates as trade war rages
[SYDNEY] Australia's central bank held rates at an all-time low of 1 per cent on Tuesday as it weighed the impact of past easing, though markets are wagering the tide of policy stimulus sweeping the world will compel it to cut again before year-end.
The Reserve Bank of Australia's (RBA) quarter-point cuts in June and July have, in reality, struggled to gain traction in the face of hard-pressed consumers at home and global uncertainty cast by the Sino-US trade dispute.
RBA governor Philip Lowe acknowledged there might be more to do after its monthly board meeting, adding it was "reasonable" to expect lower for longer interest rates to help boost employment growth and inflation.
Futures are pricing in a cut to 0.75 per cent by October, and 0.5 per cent by early next year.
"You do get the sense that if they are concerned about the unemployment rate going in an upward trajectory they will move again," said JPMorgan Chase & Co economist Ben Jarman.
JPMorgan expects the RBA will pause this year before resuming easing in early 2020.
The RBA will issue updated economic forecasts this Friday and Mr Lowe offered a taster on the outlook, noting that consumer prices would stay subdued for a long time to come.
Inflation is not seen reaching the floor of the RBA's 2 to 3 per cent target band over 2020. The jobless rate is also not seen hitting the RBA's aspirational 4.5 per cent target over the next two years.
Mr Lowe will appear before a parliamentary economics committee on Friday where he will field questions from lawmakers on the economy and the future course of monetary policy.
Mr Lowe has already taken what is seen as a step towards forward guidance by saying it was "reasonable to expect that an extended period of low interest rates will be required in Australia".
This tactic has been used by many central banks to put downward pressure on both long-term borrowing costs and their currencies.
The ploy has had some success with Australia's 10-year bond yield diving 21 basis points in just the past month to hit an historic trough of 0.993 per cent.
The local currency has shed 1.2 per cent in the same period to touch seven-month lows at US$0.6748, a huge boost to export earnings from resources which are priced in US dollars.
TRADE BOOM AMID THE GLOOM
Data out on Tuesday showed the country's trade surplus ballooned to a record A$8 billion (S$7.50 billion) in June capping easily the best quarter on record for exports.
Australia may have even enjoyed its first quarterly current account surplus since 1975, lessening its reliance on foreign funding at a time when global markets are stressed and providing scope for some fiscal stimulus.
"We do think... there will be capacity for fiscal policy at some point," JPMorgan's Mr Jarman noted. "That will certainly take some pressure off the RBA but we don't think that's coming anytime soon."
Economists are unsure whether Australia can maintain its strong trade position in the face of a sudden flare-up in Sino-US trade tensions, which is prompting a new round of global policy easing.
New Zealand's central bank is considered certain to cut its rates on Wednesday while markets are now pricing in 115 basis points of easing from the Federal Reserve out to the end of next year.
There was no mention in the RBA's statement of the most recent tariff war escalation. But Mr Lowe will likely be asked about the impact from trade war at his Friday testimony while deputy governor Guy Debelle speaks on "Risks To Outlook" next week.
"Given governor Lowe's previous concerns about adverse trade developments, Australia's stronger external position and resilience in key exports to key export destinations is a marginal argument in favour of stable monetary policy right now," Citi economist Josh Williamson said.
"However, we aren't expecting further gains in the trade surplus and instead expect some moderation in the second half of the year," he added.
"Regardless, domestic labour market developments are likely to be the key behind ongoing RBA policy discussions going forward outside of the risk of negative global shocks."