Australia's Central Bank Cut Rate to Boost Inflation, Growthby
Still ‘considerable uncertainty’ about jobs, CPI pressures
Strong growth potential could be assisted by lower rates: RBA
Australia’s central bank said inflation would remain low and the economy could grow faster, while house-price concerns had cooled, in explaining its decision to cut interest rates for the second time in four months.
“While prospects for growth were positive, there was room for stronger growth, which could be assisted by lower interest rates,” the Reserve Bank of Australia said in minutes of its Aug. 2 meeting, when the benchmark was reduced to a fresh record low of 1.5 percent. “The risks associated with rising household sector leverage and rapid gains in housing prices had diminished.”
RBA Governor Glenn Stevens and his board are using easy policy and a weaker currency to encourage growth in services like tourism and education amid the winding down of a once-in-a-century mining boom. It’s been hit and miss: while the economy has grown faster than the central bank predicted and unemployment remained under 6 percent, core inflation and wage growth are both at record lows and there’s little sign of a pick-up in business investment.
“There continued to be considerable uncertainty about momentum in the domestic labor market and the extent to which domestic inflationary pressures would rise over the next few years,” the central bank said.
The currency is heading the wrong way, climbing almost 12 percent from a mid-January trough as the U.S. hesitates on tightening policy and the European and Japanese central banks run rates at zero or negative and expand bond buying programs. The RBA reiterated that “an appreciating exchange rate could complicate” necessary adjustments in the economy following the mining boom.
The Aussie edged lower in Sydney, buying 76.59 U.S. cents at 12:23 p.m. compared with 76.70 before the report.
Outside of inflation, one reason for this month’s cut was to prevent the local dollar from propelling even further as Australia’s cash rate remains high compared with developed world peers. Traders are pricing in a 50-50 chance the central bank will cut rates again at its final meeting of the year in December. The RBA gave no guidance today on monetary policy.
The central bank said dwelling investment was expected to increase further, though the contribution to output growth was expected to diminish over coming years.
“The number of dwellings under construction had increased to very high levels,” the RBA said. At the same time, “the pipeline of residential construction work, which included work that had not yet commenced, had increased the risk of oversupply in parts of the country.”
Returning to price pressures in the economy, the central bank said the balance of supply and demand in the housing market was important for the inflation outlook as housing costs “make up a significant share” of the CPI basket.
At a global level, Australia is watching nervously as China, its biggest trading partner, tries to balance liberalization of markets while maintaining a decent level of short-term growth. China’s recent stabilization faltered last month as data Friday showed factory output, retail sales and investment all slowed, while the broadest measure of new credit rose the least in two years.
“The outlook for the Chinese economy remained an important source of uncertainty for global growth and the demand for commodities,” the RBA said. “The effect of the easing in growth in China had been evident in a number of East Asian economies and emerging economies in other regions with strong trade links to China.”
Chinese policy makers face a choice: boost demand with cheap credit that risks undermining financial stability, or curb debt expansion even if that slows the economy. Last week’s data suggests the second option is being pursued for now. With tepid global demand and domestic businesses reluctant to invest, the government has increased fiscal support this year, even as it held off from further benchmark interest-rate reductions.
Australia has taken the opposite tack, putting the burden on Stevens and his board to support growth as the government tries to rein in a budget deficit to save the country’s AAA credit rating. As a result, there’s little prospect of additional spending to promote growth.
The RBA said, after a strong expansion in the first quarter, that growth “appeared to have moderated” in the three months through June.
Australia’s jobless rate stands at 5.8 percent, and analysts predict ahead of an update Thursday that the economy added 10,000 jobs in July and unemployment was unchanged. Meanwhile, wages data Wednesday is expected to show pay packets increased 2 percent in the second quarter from a year earlier, a new record low. The upside, according to the RBA, is that weaker wage growth has encouraged more hiring by employers.
The RBA’s board “on balance, judged that prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy at this meeting.”