Australia’s central bank will probably have to cut interest rates again as a record resources-investment boom fades, according to Pacific Investment Management Co., which runs the world’s biggest bond fund.
With mining now detracting from growth, the Reserve Bank of Australia probably will need to provide monetary stimulus for an extended period to let other parts of the economy pick up the slack, Sydney-based money managers Adam Bowe and Robert Mead wrote in an article published today on Pimco’s website.
“Until we see some meaningful signs of a growth handoff from the mining sector to a new balance sheet that has the capacity to expand, our base case calls for sub-trend growth outcomes in Australia,” according to Bowe and Mead. “In this environment, we expect that the RBA will have to keep interest rates low for an extended period, and likely lower them further, supporting bond prices over the cyclical horizon.”
The RBA reduced its benchmark by 2.25 percentage points over the past two years to an unprecedented 2.5 percent as the country’s economic expansion slowed and the jobless rate climbed to the highest level since 2009. Governor Glenn Stevens left rates unchanged this month following an uptick in business sentiment and investors see a less than 50 percent chance he will cut again by May, swaps data compiled by Bloomberg show.
Australian business confidence surged in September to the highest level in 3 1/2 years as majority government and lower interest rates encouraged companies, according to a National Australia Bank Ltd. survey published yesterday.
Pimco remains “skeptical” the recent improvement in business sentiment signals stronger investment intentions by non-mining companies, Mead and Bowe wrote. While a smooth transition to growth led by non-resources industries is the RBA’s preferred scenario, signs of this happening are not yet apparent, they said.
It is possible that record-low interest rates could lead households to take on more debt, rather than spurring business investment, Pimco said. This would pose a difficult policy dilemma for the RBA, by providing a temporary fillip to growth while creating longer-term risks, the fund manager said.
A survey of consumer confidence released today by Westpac Banking Corp. showed sentiment dropped 2.1 percent this month from the more than 2 1/2-year high reached in September.
“Today’s survey shows a high outright level of overall consumer confidence although respondents remain cautious about their own finances,” Westpac’s Chief Economist Bill Evans said in a statement. “There is also some early evidence that the gloss may be coming off the housing market as rising prices start to impact on affordability and confidence.”
Data released this month showed home prices in Australia’s capital cities surged to a record, with the RP Data-Rismark index jumping 5.5 percent in September from a year earlier.
The other potential scenario for the Australian economy is that demand will slow as both businesses and households fail to fill the growth gap created by the tapering of mining investment, Pimco said. The Newport Beach, California-based fund manager identifies the performance of the economy in the first half of 2013, which has prompted the RBA to lower its key rate by 50 basis points so far this year, as belonging to this category.
The Australian government’s benchmark 10-year bond yielded 4.07 percent as of 12:52 p.m. in Sydney, having risen from 3.81 percent at the end of last month. The local currency bought 94.18 U.S. cents, up 1.1 percent since Sept. 30.