Tuesday, August 1, 2017

Australia holds rate, growth to take hit from higher AUD

    Australia's central bank kept its benchmark cash rate at 1.50 percent, as widely expected, but cautioned the recent rise in the Australian dollar "would be expected to result in a slower pick-up in economic activity and inflation than currently forecast."
     Today's statement by the Reserve Bank of Australia (RBA) on the effect of an appreciating Australian dollar - known as the Aussie - goes beyond the central bank's recent references in which it said a higher exchange rate would "complicate" the adjustment from booming mining investment.
      The Aussie has been rising sharply in the last three months after trading largely sideways since early 2016, with last month's rate rise by Canada's central bank fueling speculation the RBA would also be shifting toward a tighter policy stance.
      However, RBA officials, including Governor Philip Lowe, have dampened such speculation in recent weeks by saying they are comfortable with the current low interest rates and today's monetary policy statement bolsters this view.
     "The higher exchange rate is expected to contribute to subdued price pressures in the economy," Lowe said today, adding this was weighing on the outlook for output and employment though the low level of interest rates is continuing to support the country's economy.
      In response to the RBA's statement, the Aussie fell to 1.25 to the U.S. dollar from 1.24 but was still up 11 percent since the start of this year. However, it still remains well below par to the U.S dollar that was seen from 2011 to early 2013.
      While the RBA,  which has maintained its rate since cutting it in August 2016, said its economic forecasts were largely unchanged and the economy is still expected to grow at a rate of around 3 percent in coming years, consumption remains a source of uncertainty.
      High levels of household debt along with slow growth in real wages are likely to constrain consumer spending and while unemployment is expected to decline the RBA expects that growth in wages will remain low and continue so for a while.
      Inflation in Australia, like in other advanced economies, remains below 2 percent and is only expected to rise gradually as the economy strengthens.
      Headline inflation eased to a lower-than-expected 1.9 percent in the second quarter of this year from 2.1 percent in the first quarter while core inflation was unchanged at 1.8 percent.

     The Reserve Bank of Australia issued the following statement:

"At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.
Conditions in the global economy are continuing to improve. Labour markets have tightened further and above-trend growth is expected in a number of advanced economies, although uncertainties remain. Growth in the Chinese economy has picked up a little and is being supported by increased spending on infrastructure and property construction, with the high level of debt continuing to present a medium-term risk. Commodity prices have generally risen recently, although Australia's terms of trade are still expected to decline over the period ahead.
Wage growth remains subdued in most countries, as does core inflation. Headline inflation rates have declined recently, largely reflecting the earlier decline in oil prices. In the United States, the Federal Reserve expects to increase interest rates further and there is no longer an expectation of additional monetary easing in other major economies. Financial markets have been functioning effectively and volatility remains low.
The Bank's forecasts for the Australian economy are largely unchanged. Over the next couple of years, the central forecast is for the economy to grow at an annual rate of around 3 per cent. The transition to lower levels of mining investment following the mining investment boom is almost complete, with some large LNG projects now close to completion. Business conditions have improved and capacity utilisation has increased. Some pick-up in non-mining business investment is expected. The current high level of residential construction is forecast to be maintained for some time, before gradually easing. One source of uncertainty for the domestic economy is the outlook for consumption. Retail sales have picked up recently, but slow growth in real wages and high levels of household debt are likely to constrain growth in spending.
Employment growth has been stronger over recent months, and has increased in all states. The various forward-looking indicators point to continued growth in employment over the period ahead. The unemployment rate is expected to decline a little over the next couple of years. Against this, however, wage growth remains low and this is likely to continue for a while yet.
The recent inflation data were broadly as the Bank expected. Both CPI inflation and measures of underlying inflation are running at a little under 2 per cent. Inflation is expected to pick up gradually as the economy strengthens. Higher prices for electricity and tobacco are expected to boost CPI inflation. A factor working in the other direction is increased competition from new entrants in the retail industry.
The Australian dollar has appreciated recently, partly reflecting a lower US dollar. The higher exchange rate is expected to contribute to subdued price pressures in the economy. It is also weighing on the outlook for output and employment. An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.
Conditions in the housing market vary considerably around the country. Housing prices have been rising briskly in some markets, although there are some signs that these conditions are starting to ease. In some other markets, prices are declining. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. Rent increases remain low in most cities. Investors in residential property are facing higher interest rates. There has also been some tightening of credit conditions following recent supervisory measures to address the risks associated with high and rising levels of household indebtedness. Growth in housing debt has been outpacing the slow growth in household incomes.
The low level of interest rates is continuing to support the Australian economy. Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time."


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