Morning Briefing: RBA comments point to no interest rate cut

Comments made by Governor Stevens make a December rate cut seem like an unlikely outcome.... Aussie shrugs off commodity baggage with a little help from RBA...

Do comments by RBA Governor rule out interest rate cut?
Reserve Bank of Australia (RBA) Governor Glenn Stevens has seemingly put to bed any speculation that next Tuesday’s board meeting could end with a lowering of the official cash interest rate.

Currently sitting at 2%, there had been some talk the December meeting could result in the first rate cut since May, but comments made by Stevens this week now make that seem like an unlikely outcome.

According to reports in Fairfax media, when asked at the Australian Business Economists Annual Dinner if the RBA hasn’t cut the official cash rate because it believed economic growth was showing signs of speeding up or because they were wary of the impact it would have on incomes of retirees who lived off interest, Stevens responded "You are making the case for us to sit still.”

"It is an idea I happen to agree with,” he said.

While Stevens did not explicitely rule out a rate cut, saying his “more than content” to lower rates if the situation called for it, Philippe Brach, chief executive officer of Multifocus Properties & Finance, believes his comments have effectively taken a rate cut off the table for the time being.

“Absolutely, he’s very clearly said it’s time for everybody to just chill out a bit and wait to see what happens in February,” Brach said.

“Even in February it’s hard to see anything happening, I think we’re going to see a stalemate for a while,” he said.

That stalemate could be bad news for borrowers, with Brach believing they would have got at least some benefit had the RBA made a cut.

“I think there would be some of it passed on to borrowers. We wouldn’t see it all passed on, the lenders would come up with some reason not to.”

Though he believes existing borrowers would benefit from a downward move by the RBA, Brach doesn’t believe any such move would result in a sudden increase of investment activity.

“I’m not convinced that would happen. We’ve already had quite a lot of rate cuts and they have less of an impact as rates get lower.

“I think at the moment it’s cheap enough for people to do it if they want, so I don’t think a cut is going to spur on any activity.”  

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Aussie shrugs off commodity baggage with a little help from RBA
(Bloomberg) -- Australia’s dollar is doing its best to shake the commodity tag that’s been dragging it down and its central bank is helping.

The Aussie is holding a 1.9 percent advance for November even as iron ore, Australia’s chief commodity export, heads for a 12 percent plunge. While the nation’s economic fortunes are tied to the demand for raw materials, the Reserve Bank of Australia’s reluctance to cut interest rates has bolstered the currency, forcing some investors to close bearish bets.

“I’m not sure what the disconnect is, given we are seeing iron ore just keeps slipping every day,” said Sally Auld, head of fixed-income and currency strategy for Australia at JPMorgan Chase & Co. “It feels a bit unsustainable, because if we are near 75 cents by year-end, the RBA may start to get a bit uncomfortable, especially given what commodities are doing.”

The Aussie climbed to 72.76 U.S. cents, its highest level since Oct. 23, before buying 72.73 cents as of 6:55 a.m. in London. Its gain this month is the biggest among 10 major developed currencies. 

‘Chill Out’
Australia’s central bank Governor Glenn Stevens said Tuesday that markets should “chill out” on prospects for another interest-rate cut, enjoy the festive season and then reassess the economic data in February. The RBA has maintained its cash rate at a record-low 2 percent, after last easing in May.

The probability of a 25-basis-point rate cut by the end of May was 40 percent on Wednesday, swaps data compiled by Bloomberg show. At the end of last month, traders had priced in an 84 percent chance of at least one cut by May.

Commodity Futures Trading Commission data showed large speculators held a net 66,464 contracts betting on Aussie declines as of Nov. 17. That’s the most since bearish bets reached a record on March 10.

The Aussie’s fortunes may turn again next week as Federal Reserve Chair Janet Yellen speaks Dec. 2, followed by a European Central Bank meeting and U.S. payroll report. 

“Markets have priced out some chance of an easing, so interest-rate differentials are helping the Aussie as is a bit of short covering,” Auld said. “Next week will be pretty critical because on the U.S. side we get another payrolls number and Yellen speaking. That might put an end to the Aussie’s run.”

Futures indicate a 74 percent chance of the U.S. central bank raising its benchmark rate at its December meeting, data compiled by Bloomberg show. The calculation assumes the effective fed funds rate averages 0.375 percent after the first increase, compared with the current zero to 0.25 percent target range.

U.S. financial markets will be closed Thursday for the Thanksgiving holiday.

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