Re­serve Bank of Aus­tralia sees scope for eas­ier pol­icy

The Pak Banker - - COMPANIES/BOSS -

Aus­tralia's cen­tral bank main­tained its fore­cast of ac­cel­er­at­ing growth in re­sponse to easy pol­icy, even as risks around key trad­ing part­ner China cast a shadow over the re­gional eco­nomic out­look. The Re­serve Bank of Aus­tralia trimmed its in­fla­tion fore­cast for the year through June 2016 and its 2017 growth pro­jec­tions in a quar­terly mon­e­tary pol­icy state­ment Fri­day but it kept most of its es­ti­mates un­changed.

"A fur­ther in­crease in growth in house­hold in­comes and de­mand is an­tic­i­pated, sup­ported by ris­ing em­ploy­ment, low in­ter­est rates and lower" gaso­line prices, it said "The out­look for China's growth is a sig­nif­i­cant un­cer­tainty for the out­look for the Aus­tralian econ­omy."

Aus­tralia is ben­e­fit­ing from a de­pre­ci­at­ing lo­cal dol­lar that helps in­su­late the econ­omy from shocks abroad and in­creases the com­pet­i­tive­ness of lo­cal in­dus­tries, whereas ju­ris­dic­tions like Europe and Ja­pan are strug­gling with their cur­ren­cies. Pol­icy mak­ers kept rates un­changed at a record-low 2 per­cent Tues­day for a ninth month as they gauge the im­pact of re­cent fi­nan­cial mar­ket tur­bu­lence on global and do­mes­tic growth.

"If the RBA is go­ing to be pushed off its 2 per­cent-perch it's go­ing to be from off­shore head­winds, not do­mes­ti­cally," said An­nette Beacher, head of Asia-Pa­cific re­search at TD Se­cu­ri­ties in Sin­ga­pore, re­fer­ring to what might drive a rate cut. "Do­mes­ti­cally they seem very com­fort­able." Traders are pric­ing in a bet­ter-than80 per­cent chance the RBA will cut rates in the next six months. The Aus­tralian dol­lar was lit­tle changed from be­fore the state­ment, trad­ing at 71.93 U.S. cents at 12:45 p.m. in Syd­ney.

The mar­ket up­heaval in part re­flects "con­cerns about the evolv­ing bal­ance of risks in China and the abil­ity of the Chi­nese au­thor­i­ties to man­age a chal­leng­ing eco­nomic tran­si­tion," the cen­tral bank said to­day. "Any sharp slow­ing in eco­nomic ac­tiv­ity or in­crease in fi­nan­cial stresses in China could spill over to other economies in the re­gion."

China de­val­ued its cur­rency in Au­gust and then un­der­took an eight-day stretch of weaker yuan fix­ings through Jan. 7, roil­ing global fi­nan­cial mar­kets and fu­el­ing con­cern it was fa­vor­ing de­pre­ci­a­tion to re­vive the slow­est growth in a quar­ter cen­tury. China's cen­tral bank has at the same time been burn­ing through its cur­rency re­serves to sup­port the yuan amid record cap­i­tal out­flows. At the same time, Aus­tralia recorded its big­gest quar­ter of em­ploy­ment growth on record at the end of last year and un­em­ploy­ment fell to 5.8 per­cent, even as the econ­omy was on course to ex­pand at a below-trend pace.

"It is pos­si­ble that the strength in the la­bor mar­ket data con­tains in­for­ma­tion about the econ­omy not ap­par­ent in the na­tional ac­counts data," the RBA said. "In part, em­ploy­ment growth ap­pears to have re­flected the rel­a­tively strong growth of out­put in the more la­bor-in­ten­sive sec­tors of the econ­omy, such as house­hold ser­vices."

The RBA is try­ing to or­ches­trate a tran­si­tion away from min­ing in­vest­ment to other in­dus­tries in the econ­omy, us­ing low rates and a weaker dol­lar as a tail­wind for in­dus­tries. In some ar­eas this is work­ing: ris­ing house prices have fu­eled a res­i­den­tial con­struc­tion boom and con­di­tions for busi­ness are above av­er­age. Yet there is still no sign of an uptick in in­vest­ment out­side the min­ing in­dus­try while re­source firms are about half way through the un­wind­ing of their spend­ing pro­grams.

Re­flect­ing lower global com­mod­ity prices, the cen­tral bank to­day low­ered its fore­cast for the terms of trade, or the ra­tio of ex­port prices to im­port prices, by about 4 per­cent com­pared with its Novem­ber es­ti­mate. Given in­fla­tion is low and the cen­tral bank ex­pects lit­tle up­turn, it re­it­er­ated that there may be "scope for eas­ier pol­icy, should that be ap­pro­pri­ate to lend sup­port to de­mand."

While global cen­tral banks are strug­gling with dis­in­fla­tion or out­right de­fla­tion that an open econ­omy like Aus­tralia's will be ex­posed to, one of the cu­riosi­ties to date is the lack of pass through of higher im­port prices from a fall­ing cur­rency. The RBA said to­day that based on his­tory, the di­rect ef­fect of the de­pre­ci­a­tion since early 2013 should add about half a per­cent­age point to un­der­ly­ing in­fla­tion over each year of the fore­cast pe­riod. It in­di­cated this time may be a bit dif­fer­ent. "Height­ened com­pet­i­tive pres­sures, in­clud­ing from new en­trants into the Aus­tralian retail mar­ket, and greater ef­forts by re­tail­ers to re­duce their costs and im­prove ef­fi­ciency, are con­tin­ued to limit the ex­tent to which higher im­port prices are ev­i­dent in fi­nal retail prices for some time," the RBA said.

That's a boon for con­sumers. The cen­tral bank also said its fore­cast for bet­ter house­hold con­sump­tion and in­come growth -- re­flect­ing higher em­ploy­ment and the plunge in gaso­line prices - - in­di­cate the na­tion's sav­ings ra­tio is likely to de­cline less than pre­vi­ously ex­pected. The RBA said its li­ai­son with re­tail­ers "sug­gests that trad­ing con­di­tions im­proved in the Christ­mas and post-Christ­mas sales pe­riod." Govern­ment data is­sued at the same time as the RBA's state­ment showed retail sales were flat in De­cem­ber.

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