“Data on the domestic economy over the past few months have generally been positive,” the Reserve Bank of Australia said Friday in Sydney.
“The unemployment rate is now forecast to remain little changed over the next 18 months or so from a level that is a bit lower than had earlier been forecast, before declining over 2017 as demand growth picks up.”
Policy makers’ confidence suggests a three-month pause in interest rates at a record-low 2 percent could be extended. Pressure to further stimulate the economy has been relieved by a better labor market and a weaker currency, allowing Governor Glenn Stevens in his policy decision Tuesday to omit a reference to the local dollar being too high for the first time in 18 months.
“It sounds more optimistic than last time,” said Michael Turner, a debt strategist at Royal Bank of Canada in Sydney. “Survey data combined with the weakness in the exchange rate has been enough for the RBA to get a little more optimistic.”
The central bank said today that with the Federal Reserve expected to begin tightening policy before the end of the year, there is “a reasonable chance that the Australian dollar will depreciate further.”
It raised forecast core inflation to 2.5 percent for the next two years -- the mid-point of its target -- to account for higher import prices as the currency depreciates.
Currency Rose
The Australian dollar rose and was trading at 73.73 U.S. cents at 12:12 p.m. in Sydney from 73.49 cents before the statement. In today’s Statement on Monetary Policy, the RBA forecast average economic growth of between 2 percent and 3 percent in 2016, down from the 2.5 percent to 3.5 percent seen in May. It said rate cuts in February and May are still working their way through the economy.
“The board has judged that an accommodative stance on monetary policy remains appropriate,” it said. “The board will continue to assess the outlook and adjust policy as needed to foster sustainable growth in demand and inflation outcomes.”
The central bank also cut its forecast population growth to account for lower immigration as Australia’s labor market remains weaker than countries like New Zealand that are traditionally a source of skilled, prime-age migrants.
The working age population is assumed to grow at an annual 1.5 percent over the next 2 1/2 years, about a quarter percentage point lower each year than forecast three months earlier.
Budget Repair
The RBA also reduced its forecast for public demand as governments across Australia try to repair their budgets. Today’s statement said the risks to the global growth outlook remain broadly balanced, though they are “somewhat tilted to the downside” in China.
“There continues to be uncertainty surrounding the trajectory for growth and macroeconomic policy in China, and the implications for commodity demand,” it said. “The recent volatility in the Chinese equity market and the government’s policy response have both increased the general level of uncertainty regarding the economic outlook.”
Iron ore, Australia’s biggest export, dropped to a six-year low below $45 a metric ton in early July as Rio Tinto Group and Vale SA raised output into an oversupplied market, before rallying back into a bull market. Chinese steel production contracted in the first half as mills faced a property-led slowdown after decades of growth.
Terms of Trade
The RBA today revised down its forecast for the terms of trade, or export prices relative to import prices, by 4 percent from the May prediction to account for the more subdued outlook for Chinese steel demand.
It also said a pickup in investment outside the mining industry in Australia is unlikely in the next year or two. Still, the central bank said the further depreciation of the currency will help the economy adjust to the lower terms of trade.
It noted that business conditions are above average, firms are hiring more labor and dwelling investment is likely to remain strong in response to low rates and rising house prices.
bloomberg.com
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