Australia’s central bank may push back its next interest rate rise by three months as languishing consumer spending gives it time to assess Europe’s debt crisis and whether a mining investment boom will stoke inflation.
The Reserve Bank of Australia will raise the official cash rate a quarter of a percentage point to 5 percent in November, according to the median estimate of 21 economists surveyed by Bloomberg News this week. A survey three weeks ago showed the median estimate was for a rate increase in August. Economists at Westpac Banking Corp. went further, becoming the first among the nation’s four biggest lenders to predict a rate cut in December.
In an economy Treasurer Wayne Swan last week maintained is “the envy of the developed world,” Australian households are closing their wallets as the developed world’s highest interest rates, rising energy bills, falling home prices and global concerns sap confidence. With spending accounting for about half the nation’s economy, consumer caution is restraining growth even as the mining industry increases investment.
“The consumer is wary,” said Warren Hogan, chief economist at Australia & New Zealand Banking Group Ltd. “They’re being told that there’s this economic boom either happening or coming for Australia, but they’re not seeing it.”
RBA Governor Glenn Stevens on July 5 held the benchmark rate unchanged at 4.75 percent, his seventh straight meeting of inaction. In a statement announcing the decision, he cited the RBA’s main dilemma as the global economy downshifts: “A key question is whether this more moderate pace of growth will continue.”
On the domestic front, Stevens highlighted the economy’s split personality. The outlook for investment in resource industries “remains very positive,” while “cautious behavior by households and the high level of the exchange rate are having a noticeable dampening effect.”
Just three weeks earlier, Stevens said in a speech that rates will probably have to climb “at some point” as “the underlying rate of inflation is more likely to rise than fall.” Economists said the recent spate of weaker-than-forecast retail figures mean Stevens won’t be in a rush to raise rates.
Westpac, with A$279 billion ($297 billion) in home loans outstanding, today said in a statement that “interest rates are too high in Australia given the state of the non-mining sectors of the domestic economy.” The Sydney-based bank predicted the nation’s unemployment rate may rise as high as 5.75 percent next year from 4.9 percent last month, sending the local currency and bond yields lower.
The Australian dollar dropped to $1.0668 from $1.0724 yesterday after Westpac changed its RBA forecast. Two-year bond yields declined as much as 8 basis points, or 0.08 percentage point, to 4.325 percent, the lowest since Sept. 1.
David Jones Ltd., the second-biggest department store chain, yesterday dropped by a record 18 percent in Sydney after cutting its profit forecast on what it called an “unprecedented” decline in demand. Myer Holdings Ltd., its larger rival, dropped 6.4 percent to its lowest-ever close.
“There are some areas of the economy that are doing very, very well, but there are other parts of the economy that are not,” said Russell Zimmerman, executive director of the Australian Retailers Association, a Melbourne-based trade group representing the A$240 billion industry. “People are seeing huge increases in water, gas and electricity rates in the past 12 to 18 months -- that’s why they haven’t got the discretionary spending any longer.”
Those concerns are outweighing an unemployment rate of 4.9 percent and a currency that’s 21 percent stronger against the U.S. dollar in the past year.
House prices fell 2 percent in the second quarter and are expected to drop 1.4 percent in the next year, a National Australia Bank Ltd. poll of Australian homeowners showed this week. Australia’s S&P/ASX 200 Index is down 5.8 percent so far this year, compared with a 4.1 percent rise in the U.S.’s Standard & Poor’s 500 Index and the 1.3 percent drop in the MSCI Asia Pacific Index.
Australian consumers’ savings rate jumped to 11.5 percent in the first quarter this year, near the highest level in about two decades. Credit to home buyers in May increased at the slowest annual pace since 1977, when central bank data begins.
Retail sales unexpectedly dropped in May and consumer confidence this month plunged the most since Lehman Brothers Holdings Inc. collapsed in September 2008.
“We’ve got a consumer who’s more cautious, more savvy, more willing to wait and still a bit spooked by the global financial crisis,” said Joshua Williamson, a senior economist in Sydney at Citigroup Inc.
Australia is undergoing what economists call a structural change -- a shift in productive capacity to more mining and construction industries while the stronger currency hurts exporters, education, tourism and manufacturing. Prime Minister Julia Gillard’s government estimates that mining investment will reach A$76 billion this fiscal year.
Economists said Gillard’s proposed tax on carbon emissions, which has eroded support for her government in opinion polls, has also weighed on households, along with higher utility bills.
This week’s “awful reports from the big retailers” are among the latest evidence that consumers are still struggling, said Helen Kevans, an economist at JPMorgan Chase & Co., which this week changed its forecast for the next RBA rate increase to November from August.