RBA Says Hard to Judge If Low Rates Offset Mining, Budget

Australia’s central bank said it’s hard to gauge how much low interest rates will offset a drop in mining investment and tighter fiscal policy, adding that the currency was providing less assistance to rebalancing growth.

“Those uncertainties were likely to take some time to resolve,” the Reserve Bank of Australia said in minutes today of its June 3 meeting, where it kept the benchmark cash-rate unchanged at a record-low 2.5 percent. “The expectation of substantial falls in mining investment, below-average growth of public demand and non-mining investment remaining subdued for a time implied that the pace of growth was likely to be a little below trend over the rest of this year and into next.”

Markets and most economists predict Governor Glenn Stevens and his board will leave borrowing costs unchanged for the rest of this year to spur hiring and avoid a growth gap emerging as mining companies plan fewer projects. The government last month announced a fiscal tightening strategy that may drag on growth and consumer sentiment and, together with weaker data, reinforce the view that rates are likely to remain on hold.

The central bank repeated that the current accommodative stance of policy was likely to be appropriate for some time.

The Australian dollar has risen 7.3 percent since the RBA adopted a neutral bias in February, erasing part of its 14 percent drop last year. The currency traded at 93.82 U.S. cents at 11:32 a.m. in Sydney from 93.90 cents before the minutes.

Exchange Rate

“The earlier decline in the exchange rate was assisting in achieving balanced growth in the economy, but less so than previously as a result of its higher levels,” the RBA said, repeating the June 3 phrasing. “Members noted that the exchange rate remained high by historical standards, particularly given the further decline in commodity prices over the past month.”

An Australian-dollar index of the nation’s main commodities fell for a fourth month in May, and is down 9.5 percent this year, reflecting concern about China. Prices of iron ore, Australia’s biggest export, slid 34 percent since Dec. 31 and fell as low as $89 yesterday, the weakest since September 2012.

Growth in China, Australia’s biggest trading partner, has been slower than in 2013, “with outcomes having been a little mixed of late,” the RBA said. Policy makers said companies’ investment intentions in Australia imply that “mining investment would fall quite sharply” in 2014-15.

The board said “that at current prices most iron ore production in Australia was thought to be profitable, but that some iron ore producers in other countries were likely to have begun to incur losses,” the minutes showed.

Labor Market

Loose monetary policy in Australia has helped encourage hiring, with unemployment holding at 5.8 percent for past three months, after reaching 6 percent at the start of the year, and the economy adding almost 100,000 jobs this year. Coles supermarkets and Woolworths Ltd. are among companies hiring employees.

“Data for the labor market suggested that demand for labor had improved over the early part of the year,” the RBA said. “Forward-looking indicators were higher than they had been, but still at levels consistent with only moderate employment growth in the months ahead. The spare capacity in the labor market was leading to low growth of wages, which was expected to persist.”

A range of indicators show that a “significant recovery was underway” in housing construction, while growth in prices of established homes had eased from a rapid pace in 2013, the central bank said.

Inflation Target

It said inflation was forecast to remain within the target.

Australia’s Liberal-National government said in its May 13 budget that it will cut spending on welfare and the public service and impose a tax on the highest paid as it sets a path to surplus. RBA board members said the change in the budget position in the next couple of years is forecast to proceed “at a similar rate to earlier episodes” of budget tightening.

“Beyond that horizon, the budget implied a more substantial fiscal consolidation than had earlier been projected,” the RBA said.

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