RBA Sees China Risks Diminish as Housing Market Reignites

RBA Sees Inflation Rising in 2018

Australia’s central bank sees a better short-term outlook for key trading partner China and a commodity-price windfall for the economy, while acknowledging a renewed rise in some local property prices.

The Reserve Bank of Australia made few changes in its quarterly forecasts update: growth of 2.5-3.5 percent to June 2017, rising to 3-4 percent thereafter; with core inflation increasing to 1.5-2.5 percent by end-2018. Headline inflation was revised up due to higher tobacco prices.

“The downside risks to Chinese growth in the near term appear to have diminished,” the central bank said Friday. “The forecasts assume that the terms of trade will remain above the low point reached earlier this year. In part, this reflects the expectation that Chinese demand for steel will remain resilient in the near term.”

The unexpected injection of income from higher commodity prices and record residential building approvals will help underpin growth and suggests interest rates may remain unchanged from the current record-low 1.5 percent. But the labor market is looking a little weaker, with the RBA lowering forecast employment growth, and uncertainty remains over how heavily indebted households will consume and save.

The Australian dollar was little changed, buying 76.92 U.S. cents at 11:36 a.m. in Sydney compared with 76.86 cents before the report.

House Prices

The RBA again pointed to the reversal of Australia’s former two-speed economy, as the eastern states strengthen at the expense of the west that was at the heart of its mining investment boom. This is reflected in the property market.

“Housing price growth has picked up noticeably in Sydney and Melbourne, where auction clearance rates have also increased to high levels,” the RBA said. “Housing market conditions remain weak in Perth, where prices of both apartments and detached dwellings have declined further over the past year.”

The RBA noted Australia had now passed the largest subtraction to gross domestic product growth from the unwinding of mining investment. That makes the revival of iron ore and coal prices all the more advantageous.

“The outlook for commodity prices, particularly coal prices, is more positive than previously thought,” the central bank said, while adding that the current levels of spot prices are unlikely to be sustained.

The price of coking coal has soared about 240 percent this year and iron ore is up 50 percent.

The RBA noted again the benefit of the depreciation of the currency since 2013 as services exports have grown at “a robust pace.” It reiterated that an appreciating Aussie dollar could complicate the economy’s adjustment from mining.

The Aussie has risen 12 percent since mid-January, tracking commodity prices higher over the period.

The RBA reiterated that resource exports are likely to make a “further significant contribution” as exports of liquefied natural gas ramp up.

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