SYDNEY – The Australian dollar surged toward its highest levels since May 2015 on Tuesday following what were perceived as hawkish remarks by the central bank.
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But the markets may have gotten the message muddled, if not entirely wrong.
The minutes of the Reserve Bank of Australia's July 4 policy meeting included a discussion estimating the "nominal neutral cash rate" at 3.5%--a full 2 percentage points above the current rate of 1.5%.
Coming as markets wonder whether the RBA might follow other central banks and turn hawkish, this was enough to spur aggressive buying of the Australian dollar throughout the Asia trading day. The reaction might have been partly shock, given that on the day of that policy meeting RBA Gov. Philip Lowe suggested the bank is completely comfortable with the current level of interest rates.
Job-market indicators remain mixed, he said on July 4. Though employment growth has been stronger over recent months, wage growth remains low, and this "is likely to continue for a while yet."
The RBA has focused on the condition of the Australian consumer, warning that record household debt and record low wage growth are a toxic mix. Core inflation remains below the RBA's target band of 2% to 3%, and if wage growth remain flat, and consumers stay hamstrung by debt, the real risk is that interest rates might fall, before they are increased further.
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Economist Ian Harper, a member of the RBA's policy-setting board, told The Wall Street Journal on July 5, the RBA doesn't want to "scare the horses" with talk of premature interest-rate increases. While there has been recent improvement in full-time job creation, it is not enough to sway the RBA from its cautiousness, or prompt it to signal coming interest rate increases, he said.
It is also the case that under Gov. Lowe, the RBA board's monthly discussion topics include current economic conditions, but also special-interest topics, such as the job market. Inclusion of its thoughts around the neutral rate this month likely falls under that banner.
Chief economist at J.P. Morgan, Australia, Sally Auld, said the market got the message from the RBA's minutes all wrong.
"The market has been spooked by the revelation in today's minutes from the July board meeting that the RBA sees the neutral nominal rate at 3.50%," she said, interpreting this as meaning that rates can only go in one direction.
"This is an overreaction," she said. "It was only two weeks ago that the RBA offered a very strong refute to speculation that it would join other central banks in tilting in a hawkish direction."
Paul Dales, chief economist at Capital Economics, said the RBA clearly isn't itching to follow in the footsteps of other central banks like the Bank of Canada and turn hawkish. While unemployment has fallen to a four-year low, the bank shows little sign of wanting to pull the rate-increase trigger, he added.
"The RBA is clearly still wary of downside risks to consumption growth stemming from high household-debt levels," Mr. Dales added.
Write to James Glynn at email@example.com
(END) Dow Jones Newswires
July 18, 2017 03:16 ET (07:16 GMT)