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 percent. “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.
