RBA Says Loose Policy Likely to Be Appropriate for Some Time

The Reserve Bank of Australia reinforced that interest rates will remain on hold for the foreseeable future as a fall in mining investment and fiscal tightening weigh on growth.

“A degree of spare capacity will be present for much of the forecast period,” the RBA said in its quarterly monetary policy statement in Sydney today. “The current accommodative monetary policy setting is likely to be appropriate for some time yet.”

The central bank, in minor adjustments to its forecasts, raised projected gross domestic product growth for June 2014 to 3 percent from 2.75 percent three months earlier, and lowered its growth ranges for 2015 by a quarter percentage point. On core inflation, the RBA cut the forecast for June to 2.75 percent from 3 percent, while other periods were little changed.

With the central bank flagging inflation will remain consistent with its 2 percent to 3 percent target, growth will be below trend and spare capacity remain in the labor market, traders see little chance of an increase in the record-low 2.5 percent cash rate this year. One variable is the currency, which the central bank said today presents “a significant source of uncertainty” even as the local dollar may move lower with commodity prices.

The Australian dollar was little changed and traded at 93.59 U.S. cents at 11:39 a.m. in Sydney.

Economic Headwinds

“The economy continues to face some significant headwinds, with the large decline in resources sector capital spending getting underway and fiscal consolidation in prospect,” the RBA said. Treasurer Joe Hockey will deliver his first budget May 13 to tackle a A$123 billion ($115 billion) shortfall over four years. Still, the central bank noted “evidence of the effects of the substantial degree of stimulus already imparted has continued to accumulate.”

The RBA kept rates unchanged since August, after 2.25 percentage points of reduction starting late-2011 that has driven home prices higher, spurred a pickup in approvals for residential construction and boosted households spending.

“A pronounced increase in dwelling investment is underway, and recent information suggests that the upswing this year is likely to be a little larger than was forecast three months ago,” the central bank said. Non-mining investment growth will “remain subdued” in the near-term, it said.

Aussie Rally

The RBA referred to the currency throughout the document. The Aussie rose almost 5 percent in the past three months, the best performing Group of 10 currency, reviving pressure on industries like tourism and complicating the effort to rebalance the economy away from resource investment. It has fallen about 11 percent since a peak in April last year, with only fellow commodity producer South Africa performing worse among major currencies.

“With resource prices and therefore the terms of trade expected to decline further, historical relationships suggest that the exchange rate could move lower over time,” it said.

The central bank estimated the depreciation of the Aussie since early last year will add about a quarter to half a percentage point to underlying inflation in 2014-15 and 2015-16.

The RBA said China, Australia’s biggest trading partner, is likely to grow about 7.5 percent this year, in line with the government in Beijing’s forecasts. It said there are signs the Chinese authorities “will endeavor to provide some support to economic activity in the coming quarters” to achieve growth close to its target.

China Trade

Australia’s exports to China climbed to a record A$9.5 billion in March, even as the trade surplus narrowed to A$731 million for the month. China’s exports and imports unexpectedly rose in April, helping leaders put a floor under a slowdown in the world’s second-biggest economy.

The central bank also noted that from 2015, a number of Australian liquefied natural gas projects are expected to move into production. It estimated this would double the value of LNG exports to around 10 percent of total exports by mid-2016.

Traders are betting Australian policy makers will add 12 basis points to the cash rate over 12 months, swaps data compiled by Credit Suisse Group AG showed at 9:40 a.m. in Sydney.

A key determinant ahead will be the labor market. Australian employers added 14,200 jobs last month as unemployment held at 5.8 percent.

“Labor market conditions have shown some signs of improvement in recent months,” the RBA said. “However, the recovery in the labor market over the forecast period is expected to be fairly drawn out.”

Economic Resilience

Still, the economy is showing signs of resilience, National Australia Bank Ltd., the country’s largest lender by assets, this week posted an 8.5 percent increase in first-half profit on higher mortgage lending and lower bad-debt charges.

“The transition from mining to other sectors is occurring,” Chief Executive Officer Cameron Clyne said at a media conference in Sydney yesterday. “You simply don’t produce 5 percent unemployment for 6 straight years without the economy actually doing well.”

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