RBA’s Kent Sees Growth Picking Up in 2016 as Currency Falls

Australia’s economy will probably accelerate in 2016 as the currency falls in response to higher U.S. interest rates, central bank Assistant Governor Christopher Kent said.

Any Federal Reserve tightening would likely see “a further depreciation of the Australian dollar, which remains above most estimates of its fundamental value, particularly given the substantial declines in commodity prices,” Kent, who oversees economic forecasts, said in a speech text in Sydney today. “Growth will continue to be a bit below trend for a time, picking up gradually to be a bit above trend pace by 2016.”

Australia’s central bank has adopted a policy of patience, keeping rates at a record-low 2.5 percent for 15 months and flagging they will remain unchanged, as it aims to stimulate domestic growth drivers. In response, housing has boomed, while companies have refrained from opening their pocket books.

Business investment outside mining has been hampered by “a period of greater uncertainty and below-average confidence,” Kent said. “Both of these have changed for the better more recently, yet firms still seem reluctant to take on risks associated with substantial new investment projects. If the appetite of businesses, and shareholders, for risk were to improve, investment could pick up.”

Aussie Strength

The central banker reiterated that intervention in foreign-exchange markets remained an option if needed to push the Australian dollar lower. It fell after his comments and was trading at 86.94 U.S. cents at 2:53 p.m. in Sydney from 87.28 cents before the remarks.

“We haven’t ruled it out,” Kent said. “It’s still there as an option if needed.”

The currency averaged 93 U.S. cents in the past seven years and touched a record high of more than $1.10 in 2011. That compares with an average 68 U.S. cents in the previous seven years that included a record low of 47.8 cents in 2001.

Australia & New Zealand Banking Group Ltd. senior economist Felicity Emmett said intervention is unlikely.

“The Bank has previously highlighted that successful intervention occurs when market dysfunction has removed liquidity or when valuation is at an extreme,” she said in a research note today. “We are not at this point now.”

Moderate Growth

Kent said the Reserve Bank of Australia’s assessment of recent data is that the moderate growth recorded in the second quarter -- 0.5 percent -- has been maintained over recent months. “Pulling this all together suggests that growth has been below trend for the past two years or more,” he said.

“The near-term weakness reflects a combination of three forces: a sharper decline in mining investment over the coming quarters than seen to date; the effects of the still high level of the exchange rate; and ongoing fiscal consolidation at state and federal levels,” Kent said.

He repeated the nation’s 11-year high unemployment rate of 6.2 percent “is likely to remain elevated for some time.”

Kent said the central bank projects long-term average growth for Australia’s major trading partners for the next two years.

The RBA cut rates by 2.25 percentage points from a developed-world high of 4.75 percent between late 2011 and August 2013. Loose policy has boosted house prices, which climbed 13.1 percent in Sydney in the year through October and 8.9 percent in Melbourne, according to an RP Data-CoreLogic Home Value Index. Retail sales also surged in September by 1.2 percent, four times faster than economists estimated.

“Low interest rates, and higher housing prices, have also lent support to the growth of consumption, which has picked up over the past year or so, notwithstanding the weak growth of incomes,” Kent said. “The strength of this effect is most apparent in those states for which housing market conditions have been strongest.”

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