Monday, November 6, 2017

Australia holds rate, optimistic for non-mining investment

       Australia's central bank kept its benchmark cash rate at 1.50 percent. as widely expected, and voiced confidence about the outlook for non-mining investment, saying forward-looking indicators were "more positive than they have been for some time."
        The Reserve Bank of Australia (RBA), which has kept its rate steady since lowering it in August 2016, added increased public infrastructure investment was also supporting the economy, but household consumption remains a source of uncertainty, with household incomes still growing slowly and debt levels high.
        The RBA confirmed that it still expects growth in Australia's economy to pick up and average 3 percent over the next few years, with business conditions positive and capacity utilization rising.
        Australia's economy grew by an annual rate of 1.8 percent in both the first and second quarters of this year. In its August monetary policy statement, the RBA forecast growth would average 1.75 - 2.75 percent this year before accelerating to 2.50 - 3.50 percent in 2018 and 2.75 - 3.75 in 2019.
       The RBA said the labour market had continued to improve, with the unemployment rate expected to gradually decline from 5.5 percent in September. 
       But wage growth remains low and is expected to continue for a while yet until stronger conditions should lift wages over time.
       Australia's inflation rate eased to 1.8 percent in the third quarter from 1.9 percent in the second quarter, below RBA's target of 2.0 to 3.0 percent. But the RBA expects inflation to pick up gradually as the economy strengthens.
       As in recent months,  the RBA said the Australian dollar - known as the Aussie - had risen since the middle of this year and a higher rate will help keep down price pressures.
       However, the RBA again cautioned the strong Aussie is weighing on the outlook for output and employment and "an appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast."
       The Aussie appreciated from early May to early September but since then it has eased a bit.
       But it rose in response to the RBA's optimistic view of the economy and was trading at 1.299 to the U.S. dollar and is up 7 percent against the U.S. dollar since the start of this year.

     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 and further above-trend growth is expected in a number of advanced economies, although uncertainties remain. Growth in the Chinese economy is being supported by increased spending on infrastructure and property construction, with the high level of debt continuing to present a medium-term risk. Australia's terms of trade are expected to decline in the period ahead but remain at relatively high levels.
Wage growth remains low in most countries, as does core inflation. Headline inflation rates are generally lower than at the start of the year, largely reflecting the earlier decline in oil prices. In the United States, the Federal Reserve has started the process of balance sheet normalisation and expects to increase interest rates further. In a number of other major advanced economies, monetary policy has become a bit less accommodative. Equity markets have been strong, credit spreads have narrowed and volatility in financial markets remains low.
The Bank's forecasts for growth in the Australian economy are largely unchanged. The central forecast is for GDP growth to pick up and to average around 3 per cent over the next few years. Business conditions are positive and capacity utilisation has increased. The outlook for non-mining business investment has improved, with the forward-looking indicators being more positive than they have been for some time. Increased public infrastructure investment is also supporting the economy. One continuing source of uncertainty is the outlook for household consumption. Household incomes are growing slowly and debt levels are high.
The labour market has continued to strengthen. Employment has been rising in all states and has been accompanied by a rise in labour force participation. The various forward-looking indicators continue to point to solid growth in employment over the period ahead. The unemployment rate is expected to decline gradually from its current level of 5½ per cent. Wage growth remains low. This is likely to continue for a while yet, although the stronger conditions in the labour market should see some lift in wage growth over time.
Inflation remains low, with both CPI and underlying inflation running a little below 2 per cent. In underlying terms, inflation is likely to remain low for some time, reflecting the slow growth in labour costs and increased competitive pressures, especially in retailing. CPI inflation is being boosted by higher prices for tobacco and electricity. The Bank's central forecast remains for inflation to pick up gradually as the economy strengthens.
The Australian dollar has appreciated since mid year, partly reflecting a lower US dollar. The higher exchange rate is expected to contribute to continued 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.
Growth in housing debt has been outpacing the slow growth in household income for some time. To address the medium-term risks associated with high and rising household indebtedness, APRA has introduced a number of supervisory measures. Credit standards have been tightened in a way that has reduced the risk profile of borrowers. Housing market conditions have eased further in Sydney. In most cities, housing prices have shown little change over recent months, although they are still increasing in Melbourne. 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.
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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