Australia’s central bank: it was likely to keep interest rates at record lows for some time yet

Australia’s central bank said it was likely to keep interest rates at record lows for some time yet, citing uncertainty about whether policy stimulus alone would be enough to offset a cooling mining sector and government cutbacks.

In minutes of its July 1 meeting, where the central bank kept its cash rate at 2.5 percent for an eleventh month, the Reserve Bank of Australia (RBA) reiterated its long-held view that the economy will grow at a below-potential pace for the next year or so before picking up.

“With the significant degree of monetary stimulus already in place to support economic activity, the Board judged that, on present indications, the most prudent course was likely to be a period of stability in interest rates,” the RBA said.

“Low interest rates were working to support demand, but members agreed that it was difficult to judge the extent to which this would offset the anticipated substantial decline in mining investment and the effect of planned fiscal consolidation.”

In a comprehensive interview with a local paper published at the weekend, Governor Glenn Stevens said “the current level of rates will be supporting demand for quite some time yet”. He added that it would be “a little early” for anyone to be thinking of an interest rate rise.

Stevens said recently the bank will probably drop the phrase “period of stability” long before the first hike in rates.

Markets, if anything, and are pricing a slim chance of an interest rate cut over the next 12 months.

In recent remarks, Stevens also made clear he thought the local dollar was overvalued by most measures and that investors were under-estimating the risk of a sharp correction at some stage.

The minutes said the exchange rate was high by historical standards, particularly given the declines in key commodity prices. As a result, it was offering less help than it otherwise might in achieving balanced growth in the economy.

“Members noted that other currencies such as the Canadian and New Zealand dollars had experienced similar moves and that the most surprising development was the continued low level of the U.S. dollar, as well as the resilience of the euro,” the minutes said.

The RBA board next meets on August 5.