Photographer: Saeed Khan/AFP via Getty Images

Aussie Economy Keeps RBA in Limbo for Now

Updated on
  • Accelerating growth and weak inflation pose rate-policy puzzle
  • Central bank’s next move down projected for August meeting

For much of the past decade, Australia was labeled a “two-speed” economy. Increasingly, it may be becoming the Jekyll-and-Hyde nation -- and that’s making it tougher for the central bank to set policy.

The good -- or Dr. Jekyll -- side shows that annual economic growth has accelerated toward its 30-year average of 3.2 percent. And unemployment has fallen to 5.7 percent, below its mean for the past two decades. Those data in isolation suggests the Reserve Bank of Australia should avoid further interest-rate cuts.

The bad -- or Mr. Hyde -- side of the economy shows that core inflation has slowed to the weakest pace on record. Wage growth is at a rate last seen when the country was in a recession, a quarter century ago. The lack of price pressures suggests Australia needs easier monetary policy to combat the same disinflation that’s gripped much of the developed world, undermining capital spending and credit.

For now, the split picture will probably leave the RBA standing pat. Both economists surveyed by Bloomberg and traders see almost no chance Governor Glenn Stevens and his board will cut the record-low benchmark rate from 1.75 percent at Tuesday’s meeting -- the last before national elections next month.

July is also projected to see no action. By August, the central bank will be equipped with data on inflation for the second quarter. Another weak reading could see the central bank, as an inflation-targeting institution, forced to move again following its quarter-point easing in May.

The swaps market was pricing in about a 50 percent chance of an August cut on Monday in Sydney. The benchmark 10-year bond yield fell as much as 7 basis points to a record 2.16 percent after a weaker-than-anticipated U.S. jobs number at the end of last week saw expectations for Federal Reserve interest rate increases dialed back.

Blunt Instrument

“When the RBA gets itself to a point where they decide rate cuts are necessary, then they tend not to think they can achieve that with just one 25 basis-point cut, given monetary policy is a blunt instrument,” said Sally Auld, head of fixed-income and currency strategy for Australia at JPMorgan Chase & Co. “If they mentally get themselves over the line then they’re in it for 50 points.”

Underscoring the two narratives, private data Monday showed job advertisements jumped 2.4 percent in May from a month earlier -- signaling a healthy labor market -- while a gauge of inflation showed consumer prices fell 0.2 percent in the period as price pressure remains weak.

Shortly after the RBA cut rates to a fresh record low last month, it forecast inflation was unlikely to return to its target of between 2 percent and 3 percent this year. Data last week then showed that quarterly economic growth for the first three months was the strongest in four years at 1.1 percent.

The solid growth reading was a little misleading: one percentage point of the quarterly gain came from exports that reflect increased supply as new mines coming on line boost overseas shipments. The price of the biggest earner, iron ore, has retreated back below $50 a ton after climbing above $70 in April.

Gross national income growth, which better represents the wealth generated by the country than GDP, stagnated last quarter. That’s why Australians have failed to feel better off financially, despite solid GDP growth by developed-world standards.

The one flip-side: low rates have sparked a property boom in Sydney and Melbourne that’s seen median prices soar, giving home-owners a wealth effect. Yet even that presents problems, as highlighted by the Paris-based Organization for Economic Cooperation and Development in a report last week.

“The unwinding of housing-market tensions to date may presage dramatic and destabilizing developments, rather than herald a soft landing,” the group said.