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RBA Relies on Low Rate to Support Growth, China Risks Linger

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Australia’s central bank is relying on record-low interest rates to boost consumption and support the economy as China’s outlook remains a key uncertainty.

“The forecast for the Australian economy remained for growth to strengthen gradually,” the Reserve Bank of Australia said Tuesday in minutes of its Nov. 3 meeting. “The slowdown in Asia had been more persistent than earlier anticipated and had contributed to lower commodity prices.”

In assessing the outlook for monetary policy, the minutes reiterated a dual narrative the RBA has employed of late: prospects for an improvement of economic conditions have firmed while a low inflation outlook could provide some scope for further easing if needed.

Australian policy makers kept rates unchanged at 2 percent for the past six months as the nation’s jobs market showed signs of steady gains and the currency fell, improving the competitiveness of local companies. Yet at the same time, the expansion in Asia has eased more than the RBA expected.

The slowing in Asia “was likely to be more persistent than expected,” the the central bank said. “The outlook for the Asian region, particularly China, remained one of the key uncertainties in forecasting global growth.”

Commodity Prices

RBA Assistant Governor Christopher Kent said earlier Tuesday that the potential for commodity prices to increase is limited as China’s altered development path damps demand. Growth in China “continues to be supported by the process of urbanization, which uses commodities intensively,” he said. “This has further to run, albeit at a more gradual pace.”

Australian firms in industries including tourism, education and manufacturing have been assisted by a 32 percent fall in the Australian currency since the beginning of 2013. The Aussie was little changed after the minutes, trading at 70.92 U.S. cents at 12:17 p.m. in Sydney.

Jobs Growth

The economy is also set for its best year of jobs growth since 2010 after adding 58,600 workers in October, when unemployment fell to 5.9 percent, while consumer confidence has surged in the past two months. Expectations the RBA will further lower its benchmark have moderated -- aided by a strong U.S. jobs showing -- with traders pricing in a 26 percent chance of a rate cut by February.

“Household consumption was forecast to contribute significantly to expenditure growth over the next couple of years, supported by low interest rates and relatively strong employment growth,” the RBA said in the minutes.

Confidence has turned in Australia since Prime Minister Malcolm Turnbull deposed his predecessor Tony Abbott in a party vote in September as optimists now outnumber pessimists among consumers. The reconstituted government has placed growing the economy through innovation, rising productivity and a rebalancing of the tax system at the center of its agenda.

Rate Appetite

The minutes show “the bank’s appetite for further rate cuts is fairly small,” said Paul Dales, chief economist for Australia and New Zealand at Capital Economics. “Even so, concerns over China, the latest fall in commodity prices and a further fall in underlying inflation are reasons to believe that rates will drop below 2 percent next year.”

The RBA, in its quarterly Statement on Monetary Policy released Nov. 6, forecast growth would accelerate to 3 percent in 2016 from 2.25 percent this year.

“Support provided to the economy following the depreciation of the exchange rate was particularly apparent in the sizable contribution to growth from net services exports,” the RBA said, adding this growth was expected to continue to underpin the expansion.

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