RBA Highlights Currency Risk as Growth Forecast Raised
The Reserve Bank of Australia raised its 2012 growth forecast on stronger-than-expected consumer demand, while saying the sustained currency strength could prove more of a drag on the economy than in the past.
“Important risks revolve around exchange-rate developments,” the RBA said today in its quarterly monetary policy statement. “It is possible that the persistently high level of the exchange rate may be more contractionary for the economy than historical relationships suggest.”
The so-called Aussie closed above parity with the U.S. dollar for all but 23 days this year, remaining well above the average 75 U.S. cents since the currency was freely floated in December 1983. The RBA based its forecasts on an exchange rate of $1.06, up from $1.03 in its May statement, and assumed the overnight cash-rate target would remain at a developed-world high of 3.5 percent.
“The exchange rate has been high for some time,” and its elevated level is a key part of structural adjustment that the economy is undergoing, the central bank said.
The Aussie traded at $1.0550 as of 12:18 p.m. in Sydney, from $1.0580 in New York yesterday, when it reached $1.0613, the strongest level since March 20. The local dollar has advanced 3.3 percent this year, making it the best performer after New Zealand’s so-called kiwi among the Group of 10 currencies tracked by Bloomberg.
“It’s a more upbeat-looking statement on the growth side,” said Ben Jarman, a Sydney-based economist at JPMorgan Chase & Co. On the currency, “they’ve left the door open to say we’re in unchartered territory here in terms of it staying so high with such a weak global backdrop and with commodity prices falling, and that kind of gives them an out if later on it turns out things turn a bit weaker,” he said.
The RBA predicted average gross domestic product growth of 3.75 percent in 2012, stronger than its May estimate of 3 percent. Consumer prices will rise 2.25 percent in the year to December, from a previous prediction of 2.5 percent; underlying inflation is predicted at 2.5 percent from a previous 2.25 percent, the central bank said.
“The data currently suggest that growth in activity may have been above trend over the first half of the year, led by continued strength in resource investment, and, as measured, a strong pickup in household consumption volumes,” the central bank said.
Australia’s unemployment rate has remained in a range of 5 percent to 5.3 percent for the past 15 months. The economy added jobs in four of the past five months and unemployment declined to 5.2 percent in July from a revised 5.3 percent in the prior month, a government report showed yesterday.
“Despite the recent improvement, employment growth in the near term is expected to remain relatively modest as structural adjustment and pressure to improve productivity in many parts of the economy constrain firms’ ability and willingness to employ more staff,” the RBA said. “With the unemployment rate expected to edge higher in the near term, growth in the wage price index is expected to remain contained.”
The central bank lowered borrowing costs by a total of 50 basis points late last year and a further 75 basis points in May and June to help shield the economy from Europe’s debt crisis and slower growth in China. It held rates at its meetings in July and earlier this week.
At the past two meetings, the RBA board saw “very early signs of the effects of the easing of monetary policy.”
The central bank said inflation in the prices of internationally traded goods, or tradable items, is forecast to increase as the “lagged effect” from the earlier appreciation of the exchange rate wanes. It said the impact of the government’s carbon price on inflation will largely have passed by late 2013 and recent announcements by state regulatory authorities and energy retailers indicate that the increase in household energy prices will be apparent in the September quarter consumer price index.
Australia’s economy has benefited from high terms of trade, or export prices relative to import prices, that rose to a record in the third quarter of last year. Today’s report showed the terms of trade declined last quarter to be 10 percent or more lower than that peak.
RBA Governor Glenn Stevens is managing an economy powered by demand from emerging nations including China and India for iron ore, coal and natural gas. Chevron Corp., Royal Dutch Shell Plc, Woodside Petroleum Ltd. and ConocoPhillips are among energy companies spending $180 billion to explore and develop gas fields in Australia.
“While some resource companies have adopted a more cautious approach to investment opportunities still under consideration, but to which they are not yet committed, some major projects have gained final approval over the past few months,” the RBA said today. “Resource investment is expected to decline gradually in the latter part of the forecast period. The effect of this on GDP growth is expected to be roughly offset by faster growth in resource exports.”
Signs are mounting that Australia’s household demand strengthened in the first half of the year after retail sales in June matched the biggest advance since April 2011.
Australian house prices unexpectedly rose in the three months through June, ending five straight quarters of declines, as the central bank’s 1.25 percentage points of interest-rate cuts spurred buying.
“There are signs that residential activity may start to pick up some time in the second half of 2012,” the central bank said. “Lower interest rates, rising rental yields and population growth are likely to provide support for new housing construction.”
Traders are estimating a 40 percent chance Stevens will reduce rates by a quarter point to 3.25 percent at the next meeting in September, according to swaps data compiled by Bloomberg.
Australia’s economy will have to absorb the first reduction in spending in at least 42 years as Prime Minister Julia Gillard ends four years of budget deficits. An expected moderation in domestic demand in the second half of the year also reflects “the impact of the government’s fiscal consolidation on public demand, the RBA said.
China, Australia’s biggest trading partner, cut rates in June and July, the first reductions since 2008, as economists forecast its 2012 growth will be the slowest in 13 years.
The RBA said below-trend growth in Europe and the U.S. appears to be damping expansions in much of Asia, although in China there are signs that economic growth may have stabilized at a more sustainable pace of 7 percent to 8 percent.
‘‘A key risk for Australia is the rate of growth in China, which currently appears to have stabilized, but could be higher or lower than expected given the challenges the authorities face in keeping growth at a more sustainable rate in a rapidly changing economy,” the central bank said.
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