RBA Rate-Cut Bets Pared as Miners Plan to Boost InvestmentMichael Heath
Mining companies in Australia plan increased investment next financial year, prompting traders to scale back bets the Reserve Bank of Australia will cut its record-low benchmark interest rate again next week.
Australian businesses predicted investment of A$156.5 billion ($151.1 billion) in 2013-14, which was 3.4 percent higher than their estimate three months earlier, the Bureau of Statistics said in Sydney today. Mining investment in 2013-14 is projected at A$101.9 billion, versus A$99.2 billion three months earlier. A separate report showed building approvals surged 9.1 percent in April from a month earlier.
The Australian dollar rose and swaps markets showed declining bets RBA Governor Glenn Stevens will next week add to his 2 percentage point reduction in the cash rate over the past 19 months. The government last week said the resources-investment boom may be at its peak as A$150 billion of projects have been scrapped or delayed.
“Capex intentions were stronger than expected,” said Alvin Pontoh, a Singapore-based Asia-Pacific strategist at TD Securities Inc. The RBA “will wait and see now. It doesn’t rule out a further rate cut at some point in the future, but it makes a cut next week highly unlikely.”
The local dollar rose after the report, buying 96.53 U.S. cents at 1:06 p.m. in Sydney from 96.18 before the release. Traders are pricing in a 21 percent chance that the RBA will cut its benchmark when it meets June 4, from 35 percent yesterday, interest-rate swaps data compiled by Bloomberg show.
Capital spending declined 4.7 percent from the fourth quarter, when it dropped a revised 2.1 percent, today’s data showed. That compares with the median forecast for a 0.5 percent gain in a Bloomberg News survey of 19 economists.
Mining spending fell 6.2 percent in the quarter from three months earlier, while manufacturing slipped 0.8 percent. Companies forecast investment of A$163 billion in the year ending June 30, which was 2 percent lower than their estimate three months earlier.
“The ‘resilience’ in spending plans likely reflects some blowout in costs,” said Su-Lin Ong, Sydney-based head of Australian economic and fixed-income strategy at Royal Bank of Canada. “The survey suggests that the capex cycle may have peaked but is likely to plateau rather than collapse in the year ahead.”
The increase in building approvals in April was more than double economists’ expectations, led by an 18 percent jump in apartments, today’s report showed.
“The housing construction recovery, which began early last year but seemed to lose its way in late 2012 and early 2013, is showing signs of regaining momentum,” Westpac Banking Corp. economists led by Bill Evans said in a research report after the release.
The Australian dollar, which has declined 6.9 percent this month, averaged about $1.0350 in the past two years, versus 75.80 U.S. cents in the prior 10 years.
Ford Motor Co. said last week it will stop making cars in Australia, nine decades after founder Henry Ford first began building Model Ts in the country, as the currency’s strength undermines the local industry’s ability to compete with imports.
Australia’s central bank should keep interest rates low as a high currency and fragile confidence inhibit growth needed to compensate for a mining slowdown, the Organization for Economic Cooperation and Development said.
Gross domestic product growth will slow to 2.6 percent in 2013, down from 3 percent projected in November, the OECD said in a report released in Paris yesterday. With the economy slowing, the government’s “gradual approach” to reducing the public deficit is welcome, it said.
“The surge in mining investment, which is likely to peak in 2013, is gradually losing its stimulatory effect on activity, while new drivers of growth are taking time to emerge,” it said. “Signs of an upturn in the non-mining sector, which the easing of monetary conditions aims to stimulate, remain timid because of the persistently high exchange rate, which is weighing on companies’ confidence and their investment.”
The RBA may need to cut record-low interest rates at least two more times as mining investment peaks and slowing growth in China damps exports, said Pacific Investment Management Co., manager of the world’s biggest bond fund.
With resources investment providing 60 percent of Australian economic growth last year, policy makers need to act to support other sources of domestic demand, Sydney-based portfolio managers Adam Bowe and Robert Mead said yesterday. The Aussie dollar is still high enough to restrict the economy even after dropping to a 1 1/2-year low, they said.