Australian dollar sinks on RBA comments

Comments by RBA governor Glenn Stevens triggered heavy selling of the Aussie after he indicated further rate cuts were possible.

Comments by Reserve Bank of Australia governor Glenn Stevens triggered heavy selling of the Australian dollar after he indicated further interest-rate cuts were possible.

Speaking to a conference held by Goldman Sachs in New York overnight, Mr Stevens’ remarks reinstated a warning to markets not to downplay the likelihood that interest rates might be cut again soon, perhaps as early as May.

“Interest rates should be quite accommodative and the question of whether they should be reduced further has to be on the table,” he said.

Mr Stevens further asserted the RBA’s easing bias, saying its policy-setting board has “clearly signalled a willingness to lower [the cash rate] even further”.

The RBA’s cash rate was cut to 2.25 per cent from 2.50 per cent in February. A further easing would take it to a record low of 2 per cent.

Kieran Davies, chief economist at Barclays, Australia, said Mr Stevens was rarely so blunt.

“We regard this as strong language by his standards,” Mr Davies said. Mr Davies expects another rate cut, likely in May.

The Australian dollar was trading at US76.96c at 5pm (AEST), compared with US78.12c late yesterday.

Earlier today, the RBA published the minutes of its April 7 policy meeting, which disappointed many traders, who were expecting a rate cut in the month.

Still, the central bank indicated that a cut in rates was discussed at the meeting, but a decision was made to wait for more data, such as the first-quarter inflation report, due tomorrow.

“Further easing of policy may be appropriate over the period ahead to foster sustainable growth in demand,” the minutes said.

The RBA explained its reluctance to cut in April saying there is a question mark over how effective a further interest-rate cut would be, given they are already very low.

Policy-board members noted that the response of borrowers and savers to interest-rate changes was “unusually uncertain in a world of very low interest rates and high household leverage”.

Annette Beacher, head of economic research in Asia at TD Securities, based in Singapore, said she was confident the RBA would announce a rate cut at its May 5 policy meeting.

Ms Beacher said there was no pressing inflation threat, so “one hurdle (for further rate cuts) will be breached,” when the data is published tomorrow.

Economists expect inflation in the quarter to be negligible, with the year-over-year rise in the consumer price index likely to be near 1.2 per cent, well below the RBA’s 2 to -3 per cent target band.