The Reserve Bank of Australia will have to cut interest rates further as China’s economic expansion slows, according to Pacific Investment Management Co., manager of the world’s biggest bond fund.
The Australian government’s commitment to return the budget to surplus in 2012-13 will also add impetus for additional policy easing, the money manager said in an e-mailed report today.
Demand from China for resources has fueled a mining boom that has buoyed Australia’s economy and kept it out of recession for two decades. A government report due tomorrow may show that export growth in China, Australia’s biggest overseas market, was the slowest in two years. RBA policy makers have cut the bank’s main lending rate by a quarter of a percentage point at each of its past two meetings as Europe’s debt crisis threatens global growth.
“We expect the global environment to be less supportive, with lower than consensus growth forecasts for China in particular,” Robert Mead, Pimco’s head of portfolio management in Australia, wrote. “We think the RBA will need to ease further in 2012.”
Traders are betting that RBA Governor Glenn Stevens will lower the benchmark by a further 0.75 percentage point by May, futures prices show. They indicate a 84 percent chance of a 0.25 percentage point cut at the next policy meeting on Feb. 7.
China’s exports rose 13.4 percent in December from a year earlier, according to the median estimate of economists in a Bloomberg News survey before the data is released tomorrow. Excluding distortions in January and February each year related to the Lunar New Year, that would be the smallest increase since export growth resumed in December 2009.
The Australian government said in November that it would cut A$6.8 billion ($6.9 billion) in spending to meet Prime Minister Julia Gillard’s pledge to deliver a budget surplus even as revenues fall. This more restrictive fiscal policy, along with “tight” financial conditions will increase the likelihood of monetary easing, Pimco said.
Australian 10-year government notes advanced, with yields falling four basis points, or 0.04 percentage point, to 3.76 percent as of 12:33 p.m. in Sydney. The nation’s debt maturing in more than a year returned 14.4 percent last year, the third-best performance after the U.K. and New Zealand, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.
Australia’s dollar appreciated against 14 of its 16 major counterparts last year and fell 0.6 percent to $1.0165 today.