Slower growth means rates could fall further
Jacob Greber
800 words
9 May 2015
The Australian Financial Review
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English
Copyright 2015. Fairfax Media Management Pty Limited.
The Reserve Bank of Australia has kept open the option of cutting official interest rates even further because a soft economy and faltering wages growth could slow inflation too much over the next two years.
In a warning that a long-standing business investment strike shows no signs of breaking, the Reserve Bank issued an outlook that buttresses the federal government's strategy of slowing the pace of budget repair in order to cushion the fragile economy. With the positive effects of the mining boom receding fast and commodity price falls triggering fresh budget revenue write-downs, officials also indicated they are becoming increasingly worried about China, Australia's biggest export destination.
"Risks remain tilted to the downside" in China because of a weak property market and lack of new infrastructure funding, the Reserve Bank said in its quarterly statement on Monetary Policy on Friday. Fears of a sudden slump in China, which announced an unexpected 11.1 per cent fall in exports in April, are likely to further depress commodity prices - making it even more important that the Australian dollar continues to fall.
The central bank cut the official cash rate this week for the 10th time since late 2011, taking the benchmark to a record-low 2 per cent. A lack of a specific so-called "easing bias" in Tuesday's statement saw investors boost bets that the Reserve Bank had finished its current easing cycle and that the next move would be an increase.
The speculation saw the dollar strengthen sharply earlier in the week, with the dollar easing after Friday's statement to finish at US79.06¢ on Friday, still significantly above the US75¢ level the Reserve Bank would prefer.
"Further depreciation of the exchange rate seems both likely and necessary," the bank said in its statement on Friday.
In a forecast likely to be reflected in the budget, RBA officials trimmed a quarter of a percentage point off GDP growth for the next two years. The year-average growth for the coming fiscal year, 2015-16, has been cut by half a percentage point to a range of 2-3 per cent. This reinforces private forecasts of a blow-out in the budget deficit with the mid-point estimate for GDP reduced to 3 per cent in 2016-17 from 3.25 per cent three months ago.
Inflation will be between 1.75 per cent and 2.75 per cent over the next two years, a sign the Reserve Bank may have little choice but to cut the cash rate further to push price gains back within its 2-3 per cent target range.
Barclays Australia chief economist Kieran Davies said the inflation forecast represents a clear "easing signal" because officials normally assume inflation will remain within the target band that far into the future.
"These lower forecasts now imply that the cash rate is too high to keep inflation in the target band," he said.
Mr Davies says the most likely scenario is that rates would remain on hold, but there was a risk of another cut in the second half of the year.
"While we still think that the RBA is too pessimistic on the economic outlook, we think frustration with the relatively high currency will have a major bearing on the RBA's deliberations."
Bonds rose after the Reserve Bank's statement, with the benchmark three-year yield falling 2 basis points to 2.13 per cent. The 10-year yield fell to 2.84 per cent.
Several times throughout Friday's 69-page statement, the RBA highlighted how the outlook continues to weaken, despite signs of strength in household spending and a resurgent residential construction market.
GDP growth is expected to remain below average for longer than expected, with no pick-up in prospect until late next year.
While household spending will "in time" spur companies into investing more, that isn't likely to happen over the next few quarters, in contrast to what the bank anticipated three months ago.
The weaker growth outlook means the jobless rate - which was little changed at 6.2 per cent last month - will rise "gradually and peak a little later than envisaged" in February, the bank said in the statement.
With households appearing less willing to boost spending - no doubt because of softening wages growth - there may also be a limited boost from lower interest rates.
Prashant Newnaha, a rates strategist at TD Securities, said the bank left the distinct impression on Tuesday that the hurdle to further rate cuts had been raised. After Friday's quarterly statement, the "RBA has given itself more room to cut rates on grounds that inflation may breach the bottom of the 2-3 per cent target band".
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Rates guru says third cut 'likely' in August
Reserve Bank Mark Mulligan
676 words
16 May 2015
The Australian Financial Review
AFNR
English
Copyright 2015. Fairfax Media Management Pty Limited.
The only economist to accurately forecast the Reserve Bank of Australia's four interest rate decisions so far this year says the central bank will likely cut the cash rate again in 2015, although governor Glenn Stevens appears to be done for the next few months at least.
Nomura Australia rate strategist Andrew Ticehurst says a combination of low inflation, a stubbornly high Australian dollar and the slowdown in China will force the RBA's hand for a third time this year by November.
"The next real window for an RBA cut is likely August, and we currently assign a 40 to 50 per cent probability to a move at this time," he says.
"We think the probability rises again later in the year, and a move by November is more likely than not."
Although an overwhelming majority of economists surveyed by Bloomberg were on the money with the RBA's 25 basis point cut, to 2 per cent, last week, most were caught flat-footed with the February cut, which was the central bank's first in 18 months.
Only six of the 27 surveyed before the February 3 board meeting picked the 25 basis point cut, to 2.25 per cent.
Mr Ticehurst, who wasn't included in the survey, said in a note at the time that a slowing China, monetary easing around the world, sluggishness in the Australian economy and the relative strength of the domestic currency would be enough to force a cut, although he conceded it was "a line-ball decision".
He then held back in March and April, against the pack, before rejoining it for the May call.
Few economists currently expect the RBA to ease further this year, although most concede that if it did cut the cash rate again, it would be reluctantly.
More are expected to hedge their bets, however, as global events conspire to push the Australian dollar well above what the RBA considers fair value, around US75¢.
On Friday morning the Aussie was fetching US80.65¢, more than 2.7 per cent higher than before the RBA's latest cash rate cut.
The central bank's much-watched Statement on Monetary Policy for the March quarter, released a week ago, also pointed to enough domestic and global headwinds to warrant a third cash rate cut this year.
According to Citi, market pricing on the chances of another cut next month is currently 4 per cent, rising to 52 per cent by November.
"We have thought for some time that it is appropriate for the market to price in [another cut] on a "balance of risks" basis alone," Mr Ticehurst said.
"However, the May downward revisions to RBA forecasts, particularly inflation forecasts, along with a currency that is showing no sign of moving towards fair value, increase our confidence in this view." Nomura sees fair value for the Aussie at US72¢.
Although only recruited to Nomura six months ago, Mr Ticehurst is a seasoned economist, trader and financial markets analyst of about 25 years' experience. An economics graduate of Macquarie University in Sydney, he also has post-graduate diplomas in applied finance and investment, financial services and company directorships.
His list of former employers includes Suncorp Investment Management, AMP Henderson Global Investments, National Australia Bank, Queensland Investment Corporation and the Queensland Treasury Corporation.
At Suncorp, he was head of fixed interest, responsible for almost A$8 billion of funds in various cash, domestic and global fixed income portfolios.
His advice is to study all the bank's official communications and mine the same global and domestic data it does, "I believe that if you watch the data and watch markets in real time, you should be able to think about what they're likely to say."
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"The next real window for an RBA cut is likely August, and we currently assign a 40 to 50 per cent probability to a move at this time", says Nomura's Andrew Ticehurst.
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RBA has room to cut cash rate even further
THE AUSTRALIAN MAY 20, 2015 12:00AM
Adam Creighton
Economics Correspondent
Sydney
The Reserve Bank has confirmed its willingness to cut official interest rates to record lows if the economy fails to live up to its forecasts, while trying to fine-tune the effectiveness of its communication strategy.
Minutes from the RBA board’s May meeting, released yesterday, pointedly noted that lack of “any guidance on the future path of monetary policy” in governor Glenn Stevens’ announcement of the board’s decision to cut rates to 2 per cent did not mean the RBA had no desire to cut rates further.
“Members did not see this as limiting the board’s scope for any action that might be appropriate at future meetings,” the minutes said, in remarks that served to avoid a repeat of the confusion that followed this month’s policy statement, where an explicit “easing bias” was removed, prompting an unhelpful surge in the Australian dollar.
The May minutes otherwise revealed a finely balanced decision to cut rates given the board’s reluctance to fuel further demand for housing in Sydney and Melbourne set against a desire to boost sluggish growth in non-mining business investment.
“While concerned about the very strong pace of growth of housing prices in Sydney, and observing that conditions in Melbourne were strong, members saw much more muted trends in other capital cities,” the board added.
The dollar, whose high value has frustrated the RBA’s efforts to engineer quicker economic growth, shrugged off the minutes, hugging US80c for most of the day — still almost US2c higher than when the board cut rates earlier this month.
“Members also noted that further depreciation of the exchange rate seemed to be both likely and necessary, particularly given the significant declines in key commodity prices, and that such an outcome would help to achieve more balanced growth in the economy and assist with the transition to a lower terms of trade,” the minutes said. The board mulled over waiting to adjust interest rates until June, when it would have the details of the federal budget, but considered “the challenges of communication might be more effectively met” from cutting in March.
David de Garis, a senior National Australia Bank economist, said the RBA would now probably wait several months before changing policy again, giving it time to judge the accuracy of its latest downward revision to economic growth forecasts.
“Not only has recent data been better, we think that the budget will be less of a headwind to the economy than the RBA may have implicitly assumed at the time of the May board meeting,” he said.
Pricing in financial markets yesterday implied a 60 per cent chance of a rate cut this year.
“Clearly the board is a little puzzled as to why the unemployment rate has not edged up further in the face of clearly below-trend growth in 2015,” said Westpac’s chief economist, Bill Evans. “The policy response for the rest of this year will be heavily dependent on that particular expectation,” he added.
The minutes came a day after RBA deputy governor Phil Lowe noted the RBA’s readiness to cut rates if conditions warranted.
“If you look back through the interest-rate decisions of recent years, on the months where we’ve changed the cash rate we haven’t provided any guidance about what’s likely to happen in the future and I think that’s appropriate,” Dr Lowe said.
Business investment falls off a cliff
Business investment in Australia is contracting at its fastest rate in more than five years and won't improve any time soon, according to the grim results of the latest capital expenditure survey by the Australia Bureau of Statistics.
The ABS said on Thursday that private sector March-quarter investment in buildings, equipment, plant and machinery dropped 4.4 per cent, seasonally adjusted, from the previous three months, and 5.3 per cent on the year.
Resource-related investment, which underpinned Australia's most recent economic boom, plunged nearly 14 per cent compared with the same time last year. Manufacturing, too, was especially weak, down nearly 9 per cent.
Total non-mining capital expenditure fell 4.8 per cent in the quarter.
The headline fall was much worse than expected, and the largest single quarter-on-quarter drop since September 2009.
More importantly, companies' outlook for the financial year about to start remains weak, meaning the much-needed transition towards non-mining related growth is taking longer than expected.
The rapid fall-off in resource investment since its peak in 2012 has recently accelerated because of sharply declining commodity prices.
This was starkly illustrated in a separate report on Thursday by Standard & Poor's, the credit rating agency, which warned that mortgage arrears are starting to climb in mining areas.
After signalling a revised $103 billion in investment in their first estimate of 2015-16 projects, ABS survey respondents remained pessimistic for the second estimate, which came came in at just $104 billion, or 14 per cent lower than actual investment in the financial year which ends in a month.
Australia's new biggest industry
Michael Bleby
368 words
28 May 2015
The Australian Financial Review
AFNR
English
Copyright 2015. Fairfax Media Management Pty Limited.
Property is now larger than mining, home ownership, or financial services, having almost doubled its contribution to Australian gross domestic product in the last decade.
The industry, including property-related financial, professional and construction services, contributed $182.5 billion to the economy last financial year - 11.5 per cent of GDP - compared with the $147.1 billion value of home ownership and the $140.9 billion mining industry, according to research commissioned for the Property Council of Australia by consultancy AEC Group.
Lobby group the Property Council wants to use the muscle of an industry that directly employs 1.1 million people - making it the second-largest employer after healthcare and social assistance - to lobby for reforms that would speed up its growth.
"If we can unlock the potential to increase property's contribution even further, that will mean more jobs and more prosperity for Australians," Property Council chief executive Ken Morrison said.
"Governments can help make this happen by abolishing our most distorting taxes - like stamp duty - and streamlining planning processes to make housing more affordable for all Australians."
The further $279.7 billion worth of activity the industry contributed through flow-on demand for goods and services gave it a total $462.2 billion contribution to GDP last year and the flow-on activity created another 1.54 million jobs, the report says.
The industry last year paid $72.1 billion in combined Australian and state government tax revenues and local government rates, fees and charges revenue - more than double the amount of tax compared with the Organisation for Economic Co-operation and Development (OECD) average, the report said. That equates to 16 per cent of all taxes paid to the three levels of government in Australia. "Our economy needs the property industry to do well, particularly as we transition from the mining investment boom," Mr Morrison said.
"We know that governments at all levels are looking for ways to secure strong and consistent economic growth. This report confirms that they should be focused squarely on property as the industry that can deliver this for them. Our contribution to jobs and growth eclipses that of any other industry."
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^^^Another vested interest talking. If govt listen to these vested interest ramping up unproductive speculations to increase the cost of factor of production, Australia will be in big trouble.
(05-12-2014, 08:51 AM)specuvestor Wrote: [ -> ]^^ those advocating pumping non productive housing to offset productive activity decline are advocating jumping from the pan into the fire. Worse than kicking can down the road.
They have no idea... Just number crunchers. If policy makers listen to them will be disastrous
Sometimes it is not the government that is stupid
(28-11-2014, 11:47 AM)specuvestor Wrote: [ -> ]... we've seen so many boom and busts in the REGION. Why would this time be different for Australia with rising unemployment, declining commodity prices and economy boosted by housing FDI which is unsustainable?
RBA keeps lid on rates amid housing fears
DAVID ROGERS THE AUSTRALIAN JUNE 03, 2015 12:00AM
RBA hold hints at future cuts
The Reserve Bank has signalled its reluctance to cut interest rates further due to rising risks of a housing bubble, saying the outlook for rates would depend on upcoming economic data.
The comments suggest the RBA is paying more attention to the risks of a heated housing market after its own board member and Treasury secretary, John Fraser, said there was evidence of a housing bubble in Sydney and parts of Melbourne.
In highlighting a greater dependency on economic data in weighing up the outlook for interest rates, this sees the RBA again pulling away from an explicit easing bias evident in March and April.
As was widely expected by economists and traders, the central bank left its cash rate unchanged after last month lowering the key policy rate to a record low of 2 per cent.
Traders reacted swiftly, pushing the dollar up more than three-quarters of a US cent.
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MOREMissed borrower payments on rise
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GRAPHIC: RBA Statement
On the stockmarket, the benchmark S&P/ASX 200 index fell 1.7 per cent, with the interest rate-sensitive banking and property sectors faring worse than the broader market, and bond yields rose slightly.
“Information on economic and financial conditions to be received over the period ahead will inform the board’s assessment of the outlook and hence whether the current stance of policy will most effectively foster sustainable growth and inflation consistent with the target,” the central bank said after its policy meeting.
However, financial markets were surprised that the RBA did not at least highlight the fact that it had “scope” to cut interest rates further, a term it had used in the minutes of its May meeting.
“The surprising part of today’s announcement was the lack of a clear easing bias in the post-meeting statement,” HSBC chief economist Paul Bloxham said.
“Many were looking for the RBA to provide an explicit easing bias to try to encourage the Australian dollar lower … the trouble is, an easing bias, or indeed rate cuts, are not costless.”
Mr Bloxham said an explicit easing bias would have risked driving asset prices even higher.
“There is clearly increasing nervousness from officials about the risk of a housing bubble in Australia’s two largest cities,” he said.
“We see this ongoing concern about a potential housing bubble as meaning that the bar is quite high for the RBA to consider further cuts in the near term.”
While the central bank declined to say why it did not mention the possibility of further interest rate cuts — a possibility it stated clearly in March and April — the “neutral” outlook came after Mr Fraser warned there was now “unequivocally” a bubble in Sydney and evidence of a bubble “in the higher-priced areas of Melbourne”.
The annual rate of combined capital city dwelling price growth in Australia peaked at 11.5 per cent in April last year, but remained high at 9 per cent in the year to May 2015, according to the latest data from CoreLogic RP Data.
Sydney house prices rose a red-hot 15 per cent on an annual basis, while Melbourne rose 9 per cent.
The Australian Prudential Regulation Authority has told banks to limit investor loans to 10 per cent of their total loans this year, and although the Reserve Bank continued to note that property trends have been “more varied” in a number of other cities, it reiterated that the bank was “working with other regulators to assess and contain risks that may arise from the housing market”.
“We no longer call for an August rate cut,” Citi economists Josh Williamson and Paul Brennan said.
“The retreat from the RBA’s mild easing bias has meant that the window is closing on our forecast … but we still believe that the RBA will cut before the end of the year.”
Still, the dollar remained at the forefront of the RBA’s concerns about the ability of the economy to rebalance towards one driven by consumption and non-mining investment.
“Further depreciation seems both likely and necessary, particularly given the significant declines in key commodity prices,” the RBA said, repeating a more aggressive tone it adopted in May.
Disappointing economic data in the past month, together with the RBA’s own forecasts of lower growth and inflation in the years ahead, could see it cut again in November, according to Citi, particularly if the dollar remains elevated before the start of US interest rate increases.
With record low interest rates already causing a bubble in Sydney, the RBA’s clear preference was for further easing of monetary conditions to occur via a lower exchange rate.
“The RBA’s recent policy moves have been focused on the real economy, rather than the financial cycle, but the risk of inflating asset price bubbles is rising,” HSBC’s Mr Bloxham said.
But even if the Reserve Bank is constrained by the risk of asset bubbles, the clear message of its statement yesterday was that interest rates are likely to remain low. “Overall, the economy is likely to be operating with a degree of spare capacity for some time yet,” the RBA said.
“With very slow growth in labour costs, inflation is forecast to remain consistent with the target over the next one to two years, even with a lower exchange rate.
“In such circumstances, monetary policy needs to be accommodative.”
Robert Rennie, head of currency strategy at Westpac, said the central bank appeared to enjoy not delivering to financial markets what was expected from it after each monthly policy meeting .
“The pain trade is to the topside on the Aussie dollar ... the RBA has a habit of not delivering the guidance the market expects,” Mr Rennie said.
GDP data today is expected to show Australia’s growth rate slowed to an 18-month low of 2 per cent in the year to March, amid sharp falls in mining investment and commodity prices.
A survey of 11 banks by The Wall Street Journal projects GDP growth in the March quarter of 0.7 per cent, up from 0.5 per cent in the previous quarter.
Figures released by the Bureau of Statistics yesterday showed the current account deficit widened slightly less than expected in the March quarter to $10.741 billion, suggesting net exports made a stronger contribution to GDP growth than previously expected.
Australia is unmatched in the Western world in that it has not suffered a recession — commonly defined as two consecutive quarters of negative quarterly growth — since 1991, but growth remains far below the potential, normally considered to be about 3.25 per cent.
Additional reporting: Dow Jones Newswires
Australia's economy grows faster than expected
3 June 2015
Australia's economy grew at a better-than-expected 0.9% in the first quarter of 2015, compared to the previous quarter, boosted by mining together with financial and insurance services.
Forecasts were for quarterly growth of between 0.5% and 0.7%.
Official statistics also showed that household consumption expenditure boosted the quarterly growth numbers.
But economist Shane Oliver told the BBC the numbers were "well below potential".
On an annual basis the economy expanded 2.3%, beating expectations for 2.1%.
Economic growth in the March quarter of 2014 was 2.9%.
'Not out of the woods'
"The March quarter GDP [gross domestic product] growth was far better than feared just a few days ago," said Mr Oliver, who is chief economist with AMP Capital in Sydney.
"However, Australia is still not out of the woods, as annual growth at 2.3% is well below potential, and a full 0.8% percentage points of the 0.9% growth came from higher inventories and trade."
He said domestic demand remained "very weak with consumer spending and home construction only just offsetting the ongoing slump in mining investment".
"So the Australian economy has not crashed - as many had feared would happen after the end of the mining boom - but it is continuing to grow at a sub par pace," he added.
Under pressure
Australia's economy has been adjusting to a post mining-boom landscape. It saw its economy grow 0.5% in the October to December 2014 period from the quarter before, when growth was 0.4%.
On Tuesday, the country's central bank, the Reserve Bank of Australia (RBA), did not cut its lending rates further to help boost the economy, despite pressure from businesses to do so.
The decision saw Australian stocks fall 1.72% as investors saw little hope of a further cut in the near future.
However, Evan Lucas from IG Markets in Melbourne said "the collapse of [Australian stocks] on the back of the RBA not having an explicit easing bias... was a bit of an overreaction".
In May, the RBA cut its benchmark lending rate by 25 basis points to an all-time low of 2%.
Rising property prices in Australia's biggest city, Sydney, a strong currency and a drop in iron ore prices were among the reasons for the cut.
The May rate cut was the second this year, following a previous 25 basis point cut in February and followed similar action from central banks in China, Canada, Singapore, Korea and India.
A rising Australian dollar had also been cause for concern, particularly for Australia's big mining and energy exporters.
Mr Oliver said more help would likely to be required "in the form of an even lower Australian dollar - and to ensure this happens the RBA may yet still have to cut interest rates further into record low territory."
http://www.bbc.com/news/business-32970412
Bernanke warns on Aussie dollar threat
Patrick Commins
533 words
29 May 2015
The Australian Financial Review
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English
Copyright 2015. Fairfax Media Management Pty Limited.
Former US Federal Reserve chairman Ben Bernanke said that Australia would "have to respond" should a stubbornly high dollar start begin to drag on the economy.
"If Australia finds it has a strong Australian dollar and it has higher unemployment, then it would have to respond and that would either be by increasing domestic demand or by weakening its own currency," Mr Bernanke said.
Speaking at the World Business Forum in Sydney on Thursday, Mr Bernanke also threw his weight behind prudential policies aimed at taking the steam out of residential property markets, saying measures such as those taken in Australia and New Zealand to limit higher risk lending were "the best approach" to dampen price concerns.
"In Australian, the UK and other Commonwealth countries are being particularly good at using various kinds of prudential policies to address concerns about housing prices, so I think that's the best approach."
"If we don't have those types of policies - and the fiscal policies won't do anything - then it's important that the central bank be allowed to use interest rates and monetary policy to achieve its macroeconomic objectives," he said.
Mr Bernanke recognised the effect of cheap money bidding up asset prices such as shares and property, but said it did not present a threat to the global financial system.
While "there certainly are examples where there's excessive risk taking", Mr Bernanke said he didn't see anything that "looks anything like the bubbles of the tech stocks in the late 90s of the housing market in the US in 2006".
Mr Bernanke also defended the unconventional monetary policies undertaken in the United States and elsewhere, saying they had worked to stimulate economic growth. "I'm pretty confident [quantitative easing programs] have been effective, and, at least so far, they haven't had many of the bad side effects that people were saying were bound to come," Mr Bernanke said.
"It's always difficult to know how things would have gone in the absence of this policy, but most academic research finds it does work and does have effects in the economy," he said. "An in the absence of those extraordinary efforts the recovery would not have been as strong or we might have had another recession and we might not have avoided deflation as we did."
He pointed to the US and United Kingdom which were first to put in place QE and where economic recoveries were much more advanced than in Europe, which only introduced such policies early this year.
Mr Bernanke offered little insight into the path of US monetary policy, but did say that the shock of a normalisation in US interest rates would be limited if the US Fed communicated its plans clearly enough, and said he doubted there would be a repeat of the so-called "taper tantrum" of May 2013.
"There were not enough buyers in summer of 2013. It's possible that we'll see more volatility in rates because of a lack of liquidity, but if the Fed does a good job communicating, then that should minimise the shock once that normalisation begins."
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