RBA Says Low Rates Help Economy Absorb Decline in Investment

Updated on
  • Central bank comments in minutes of September board meeting
  • Economy expanded around estimates of potential in first half

Australia’s record-low interest rates are helping the economy weather a plunge in resource investment, the central bank said after leaving borrowing costs unchanged at 1.5 percent this month.

The economy is also enjoying an unexpected fillip from a 30 percent jump in the price of commodity exports compared with their trough earlier in the year, the Reserve Bank of Australia said in the minutes of its Sept. 6 policy meeting in Sydney Tuesday. The bank cited Chinese high-cost producers reducing their output of bulk commodities for the spurt in prices.

Australia expanded at “around estimates of potential growth over the first half of 2016, despite further large falls in business investment,” the RBA said. “Interest-sensitive sectors of the economy were being supported by accommodative monetary policy,” it said, while reiterating a rebound in the currency could complicate adjustment to service-industry growth.

“The minutes of the RBA’s September meeting support other evidence suggesting that the Bank is in no rush to cut interest rates again,” said Paul Dales, chief Australia and New Zealand economist at Capital Economics Ltd. in Sydney. “The one thing that could change the RBA’s view, of course, will be the release of the third quarter CPI inflation data in late October.”

The Australian dollar was little changed after the report, buying 75.42 U.S. cents at 12:25 p.m. in Sydney, compared with 75.45 cents before its release.

Spare Capacity

New Governor Philip Lowe inherited an economy about three-quarters of the way through the unwinding of mining investment, with growth underpinned by housing construction, commodity exports and services like education. But despite unemployment edging lower, anemic wage growth and weak inflation signal plenty of spare capacity in the labor market.

“Members noted that a decline in full-time employment since the beginning of the year had been recorded in New South Wales, Western Australia and Queensland,” the RBA said.

“The relative strength of part-time employment had partly reflected growth in industries that have a higher proportion of part-time jobs, such as household services, although liaison contacts had also reported that employers more generally had been taking a cautious approach to hiring.”

Resource Boost

Australia’s underemployment climbed to a record in August -- even as the jobless rate fell to 5.6 percent. Similarly, economic growth accelerated to an annual 3.3 percent in the second quarter -- higher than its 30-year average -- but a large chunk came from resource exports that require minimal labor.

Still, its 1.5 percent cash rate and solid headline economic indicators are encouraging yield hungry investors into the currency amid zero or negative rates and bond-buying programs in Europe and Japan. That puts at risk the rise of services industries like tourism that are sensitive to the exchange rate and, along with weak wage growth and inflation, explain why the RBA has eased twice in the past four months. Indeed, since a trough in January, the exchange rate has risen almost 10 percent.

Summing up its decision to hold, policy makers said the current stance “was consistent with sustainable growth in the Australian economy and achieving the inflation target over time.”

Pros, Cons

The board also discussed the pros and cons of low rates, noting that the positive effect on the disposable income of borrowing households is larger than the negative effects on the income of “lender households.” It said the average borrower household has two-to-three times more net interest bearing debt than the average lender household has in net interest-earning assets.

The board noted, however, that since the 2008 financial crisis, borrower households were more likely to use an increase in cash flow to prepay debt “which might imply a delay in the response of consumption spending to lower interest rates.”

It also said that residential building approvals could indicate high levels of dwelling investment “for some time.” The RBA maintained that conditions in the established housing market had “generally eased” this year.

Lowe, who took over as governor at the weekend, paid tribute to his predecessor, Glenn Stevens, at the meeting. He said Stevens had made an “exceptional contribution” to the board’s deliberations during his time at the bank.

“On behalf of all members, he expressed appreciation and admiration for Mr Stevens’s professionalism and integrity, his thoughtful and consultative approach to policy making and for the exceptional judgments he made during a challenging period for the global and Australian economy,” the minutes showed.