RBA retains easing bias as slower growth leaves jobless higher

[SYDNEY] Australia's central bank indicated it still has scope to ease policy if needed after cutting interest rates two weeks ago, saying slower growth would result in elevated unemployment for longer.

The rate reduction reflected signs spending by firms in the resource industry and outside it "would be weaker than expected," the Reserve Bank of Australia said Tuesday in minutes of its May 5 meeting, when it cut the cash rate to a record 2 per cent. "Generally subdued growth of domestic costs, including wages, implied that inflation was expected to be slightly lower."

The central bank also said weakness in the property market of key trading partner China was a "significant risk" to demand for commodities that have fueled Australia's expansion. This is driving down the nation's terms of trade, or export prices relative to imports, and the RBA reiterated that the nation's currency should be lower as a result.

Australia is suffering fallout as China's leaders try to wean the world's second-largest economy off reliance on exports and investment. The Australian dollar's resilience, meanwhile, combined with growth below the economy's potential of 3 percent has forced the RBA to reduce borrowing costs further than it might have, Deputy Governor Philip Lowe said Monday.

"Growth was now expected to take longer to strengthen and the unemployment rate was likely to remain elevated for longer," the central bank said in the minutes. In forecasts released May 8 and viewed by the policy board when making their decision, the RBA cut the forecast expansion for the 12 months through June 2016 by half a percentage point from three months earlier.

The board debated whether to cut rates at this meeting or in June, and resolved that communication would be a challenge if it stood pat while reducing the economy's forecast growth rate, the minutes showed. It also said the decision to remove forward guidance from this month's statement announcing the cut, as in the February reduction, had been deliberate.

"Members did not see this as limiting the board's scope for any action that might be appropriate at future meetings," the minutes said.

Traders priced in 11 basis points of rate cuts over the next 12 months ahead of the minutes, a Credit Suisse Group AG index based on swaps showed. Doubts over further easing in Australia and the timetable for the US Federal Reserve tightening have fueled a more than 5 percent gain in the currency since the start of April.

Loose policy has helped drive Sydney home prices 14.5 per cent higher in April from a year earlier.

The RBA said that "it did not appear that the growth of housing credit, either for investment or owner-occupancy purposes, had been increasing over recent months."

BLOOMBERG