Australia Keeps Interest Rates at 3% but RBA Sees 'Scope' For Further Easing (Euro Open)

The Reserve Bank of Australia kept interest rates on hold at 3% as expected but said that there is still “scope for further easing of monetary policy” and identified credit conditions and the effects of economic weakness on asset quality as “a challenge”. May’s UK industrial production report headlines the calendar in European hours.

Key Overnight Developments

• New Zealand Business Sentiment Rebounded From Record Low, Says NZIER
• Australia Keeps Interest Rates at 3% but RBA Sees ‘Scope’ For Further Easing

Critical Levels



The Euro slipped -0.2% against the US Dollar in overnight trading, while the British Pound slumped 0.4% against the greenback. Commodities and related stocks traded lower in Asian trading, boosting demand for the Dollar as a safe haven asset.

Asia Session Highlights



As we speculated in our weekly New Zealand Dollar forecast, the second-quarter edition of the NZIER Business Opinion Survey ticked higher to register at -25, meaning that a net 25% of the companies polled for the report believe the economy will deteriorate over the next six months. A record 65% of respondents were expecting worse conditions in the three months to March. Leading indicators were telegraphing a relative improvement, with the monthly NBNZ measure of business confidence rising steadily through the second quarter, swinging into positive territory in May for the first time since September 2008. Still, it remains to be seen if positive momentum can be maintained considering the soaring public deficit has seen Prime Minister John Key’s government abandon a hefty portion of the fiscal stimulus measures that had been included in the latest budget. Indeed, additional monetary easing may be in the cards in the weeks ahead despite RBNZ Governor Alan Bollard’s forecast that that economic growth will pick up by the end of this year.

The Reserve Bank of Australia kept interest rates on hold at 3%, as expected. In the statement accompanying the announcement, Governor Glenn Stevens sounded notably more aloof compared to recent months, saying that “credit conditions remain tight and the effects of economic weakness on asset quality present a challenge.” Stevens added that the bank sees “the outlook for inflation allows some scope for further easing of monetary policy, if needed…[and will] monitor how economic and financial conditions unfold and how they impinge on prospects for a sustainable recovery in economic activity.” The RBA chief also noted that firmer growth in China has helped Australia and noted tentative evidence the US is approaching a “turning point”, though Europe is “still weakening”. Stevens concluded that a durable recovery is contingent on “continued progress in restoring balance sheets.”

Euro Session: What to Expect



UK Industrial Production is expected to grow for the second consecutive month in May, adding 0.2%. In annual terms, the rate of decline is expected to ease to -11.3%, extending a moderation that began after the metric hit a record low at -12.8% in February. Still, output is still at the lowest levels in 17 years and unlikely to mount much of a recovery beyond smaller negative numbers in the headline figure as firms adjust inventories to lower levels of global demand. Manufacturing is the UK’s chief export sector, and the International Monetary Fund reckons world trade volumes will shrink -11% this year and rebound by a meager 0.6% in 2010, pointing to lackluster overseas demand and weak output growth for the time being.

Written by Ilya Spivak, Currency Analyst
Article Source - Australia Keeps Interest Rates at 3% but RBA Sees 'Scope' For Further Easing (Euro Open)

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