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RBA Sees Positive Economic Data Outweighing CPI for Now

  • Higher Aussie dollar could complicate economy’s adjustment
  • Mining investment about 4% of GDP, from 2012 peak of 8%

Australia’s central bank hailed recent positive economic data while reiterating inflation would remain low, in minutes of its June meeting where interest rates were left at 1.75 percent and no policy guidance was provided.

The expansion “over the year had increased to be a bit above estimates of potential growth, reflecting a stronger expansion in non-mining activity,” the Reserve Bank of Australia said Tuesday in the minutes. “Nevertheless, inflation was expected to remain low for some time.”

Australia’s economy is showing a split picture: recession-level wage growth and record-low inflation on the one hand; and economic growth close to its 30-year average and unemployment below its 20-year mean on the other. The central bank, meanwhile, appears content to stand pat for now as the country heads toward a July 2 election and international events like Britain’s vote on leaving the European Union play out.

“The board judged that leaving the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and inflation returning to target over time,” the minutes said. The Australian dollar rose to 74.81 U.S. cents at 11:34 a.m. in Sydney from 74.65 cents before the minutes were released.

Mining Investment

Australia’s recent growth has been supported by record-low rates and a depreciation in the currency since 2013, while declines in mining investment had been largely offset by the strength of resource exports, the RBA said.

“Members noted that an appreciation of the exchange rate could complicate the adjustment of the economy to the lower terms of trade,” it said, referring to the ratio of export prices to import prices.

The Aussie dollar has been volatile this year: It climbed 3 percent in the past month and is trading near 75 U.S. cents. The currency fell as low as 68 cents in January, before rebounding as high as 78 cents in April and then retreating again. The country has been caught in the cross-current of divergent global policies as Europe and Japan run negative rates and bond buying programs and the U.S. tries to tighten.

Still, the Aussie has dropped about 20 percent in two years, helping industries like tourism and education that have been hiring strongly and keeping unemployment at 5.7 percent.

Jobs Growth

Employment growth has lost some momentum from very strong levels recorded in late 2015, and the RBA predicted “moderate” jobs growth in the months ahead. It also said while labor cost pressures remained subdued in the first quarter, “a few wage measures were slightly more positive.”

Mining investment in Australia has fallen to about 4 percent of gross domestic product from a 2012 peak of 8 percent, suggesting it’s about two-thirds of the way through unwinding.

Looking at the economy’s broader transition from resources, the RBA said “while changes in the nominal exchange rate had played the key role in helping the economy adjust to the rise and fall in the terms of trade, this process had been assisted by adjustments in the growth rate of wages.”

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