Australia holds cash rate as commodity upswing outweighs slowdown

by NZ Adviser07 Dec 2016
(Bloomberg) -- Australia’s central bank kept interest rates unchanged as a global commodity upswing eases the impact of a weaker economy at home.

Governor Philip Lowe left the cash rate at 1.5 percent Tuesday, saying “some slowing in the year-ended growth rate is likely” while noting that higher resource export prices “are providing a boost to national income.” The decision was predicted by economists and traders heeding Lowe’s concern that further easing could destabilize an economy where households are already saddled with record debt.

The Reserve Bank of Australia has pushed an increasingly optimistic story reflecting faster growth and falling unemployment, helped by an unexpected rebound in commodity prices in response to stimulus in China. But the picture is starting to fray, with the economy predicted to have stalled or worse last quarter and labor-market hiring relying heavily on part-time employment as participation falls.

“There continues to be considerable variation in employment outcomes across the country. Part-time employment has been growing strongly, but employment growth overall has slowed,” Lowe said in his  statement. “The outlook for business investment remains subdued.”

The Australian dollar was little changed after the decision, buying 74.61 U.S. cents at 3:25 p.m. in Sydney, compared with 74.53 cents before the release.

Economists predicted ahead of data due Wednesday that gross domestic product fell 0.1 percent in the three months through September. That would be the economy’s first contraction since floods devastated the coal industry 5-1/2 years ago. The annual rate is forecast to slow to 2.2 percent from 3.3 percent in the second quarter.

Slower growth combined with record low wage gains and weak inflation would normally provide grounds for considering a rate cut. But Lowe has made clear further easing to speed up inflation would result in households taking on even more debt and could send booming east coast property prices even higher. He acknowledged the latter in his statement.

“Conditions in the housing market have strengthened overall, although they vary considerably around the country,” the RBA chief said. “In some markets, prices are rising briskly, while in others they are declining. Housing credit has picked up a little, although turnover of established dwellings is lower than it was a year ago.”

Fed Decision
The RBA has opted to watch and wait. Reasons to be patient include the Federal Reserve’s expected tightening of policy this month, which could help push down the Australian dollar. It’s been stuck in a range of 73 to 75 U.S. cents in recent weeks and any fall will aid the key service exports of education and tourism that are highly sensitive to the currency.

Another reason is that Australia’s mining investment boom is 80 percent unwound and once done will remove a drag on growth. Also, the RBA’s next policy meeting isn’t until February, when the bank will release its updated quarterly growth and inflation forecasts.

“Having eased monetary policy earlier in the year, the board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time,” Lowe said, referring to the RBA’s May and August rate cuts.

Australia’s core annual inflation averaged 1.5 percent in the third quarter, well below the central bank’s 2 percent to 3 percent target. It may take some time to return to that range and that’s what is encouraging many economists to still expect a rate cut in 2017. Traders, meanwhile, are pricing in some chance of a hike later next year.

“We believe the RBA will remain data dependent, but its tolerance of lower underlying inflation appears to remain high,” said Barclays Plc economist Rahul Bajoria. “Australia’s economic outlook appears broadly resilient to external shocks, and unless there is significant Australian dollar appreciation, we think the urgency to ease further will be limited.”

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