Australia Faces Rate Cut Pressure as Commodity Rout Darkens Outlook

  • Housing may cool, removing further prop to growth: Bassanese
  • Citi's Brennan says rate cut may come as early as November

Australian policy makers face renewed pressure to cut interest rates already at a record low as falling commodity prices darken the outlook for an economy heavily geared to selling resources to China.

While central bank Governor Glenn Stevens and his board will leave the benchmark at 2 percent on Tuesday, according to traders and economists, there is a greater chance of a cut in coming months.

Oil-reliant Canada and milk-dependent New Zealand have already eased policy to make up for weaker commodity prices and the concern in Australia is that the stimulus provided by a housing boom and falling currency will wane in 2016. Goldman Sachs Group Inc. sees a one-in-three chance of Australia falling into its first recession in almost a quarter of a century in the next 12 months.

“It’s far too early to say we’re at the bottom for commodity prices,” said David Bassanese, chief economist at exchange-traded funds provider BetaShares, who predicts the benchmark rate will fall to 1.5 percent next year. “The housing cycle, which has really protected us more than people realize, is going to turn down. Growth is going to remain weak, and I find it unbelievable that unemployment will not rise further.”

For now, the Reserve Bank of Australia is putting on a brave face. It argues that the jobless rate, which has held between 6 percent and 6.25 percent in recent months, has probably peaked and there are signs that a 25 percent drop in the currency over the past two years is reviving service industries that make up the majority of Australia’s domestic economy. Indeed, bank lending in Australia expanded 6.3 percent in the 12 months through August, the fastest growth since January 2009.

Yet the International Monetary Fund predicted Monday that the weak commodity price outlook could cut almost 1 percentage point annually from the growth rate of commodity exporters between 2015 and 2017. Prices for raw materials last month plunged to the least since 1999, according to Bloomberg’s commodity price index, amid an oversupply in everything from copper to oil and forecasts for the slowest economic growth since 1990 in China.

“Directors agreed that monetary policy is appropriately accommodative and could be eased further if the cyclical rebound disappoints, provided financial risks remain contained,” the IMF said Wednesday in a separate report on Australia. The Australian dollar’s sharp depreciation against the U.S. dollar should boost the competitiveness of non-mining exports, but “the real exchange rate still looks high relative to the decline in the terms of trade,” it said in a staff report dated Aug. 3.

Stevens cut rates in February and again in May despite house prices in Sydney jumping about 15 percent from a year earlier. Paul Brennan, chief economist for Australia at Citigroup Inc., also believes the housing boom has peaked and there is room to ease policy further.

“A pullback in investor credit growth and some investor approvals should reduce any worry the RBA might have about further cuts to official interest rates fueling housing market excess,” Brennan said. “We don’t believe the RBA will likely move at next week’s board meeting, but a November hike is still a chance.”

Goldman Sachs is also predicting a rate cut in November, along with several other analysts. Standard Chartered Plc is the only one that sees an easing next week. Traders are pricing in about a 10 percent chance of a reduction on Tuesday, rising to 30 percent in November and about 70 percent by April.

Standard & Poors said Wednesday that Australia “is a clear loser” from China’s slowdown given its high dependence on the world’s second-largest economy.

Australia is about halfway through the unwinding of its biggest mining boom since the 1850s Gold Rush, the RBA says. In the face of that unwinding, Stevens stepped up criticism of the government under former Prime Minister Tony Abbott for failing to pursue reforms that would improve productivity and boost living standards.

New Prime Minister Malcolm Turnbull pledged economic leadership and vision when he took the post in mid-September and has convened a summit of business, union and community leaders in Canberra Thursday to discuss options for the economy.

Stevens, speaking to a parliamentary panel four days after Turnbull took over, signaled that interest rates were likely to remain on hold for now.

“For us for some time the question has really been: is this interest rate appropriate to promote growth without running undue risks in the financial space,” he said Sept. 18. “We think we’ve got that balance right. The question has been more for us: should we hold or go down a bit more. And I think we’re pretty content where we are right now.”

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