SYDNEY: Australia’s central bank cut interest rates to a fresh record low as it moves to counter disinflation and support a labor market hampered by high levels of part-time work and underemployment.
Reserve Bank of Australia Governor Glenn Stevens and his board lowered the cash rate by 25 basis points to 1.5% Tuesday, as predicted by 20 of 25 economists and market bets.
Headline consumer price-growth slowed to a 17-year low last quarter, reflecting stagnant wage gains and weak global price pressures.
The cut reflects that “inflation is likely to stay low for an extended period and the labor market has lost momentum this year,” Felicity Emmett, head of Australian economics at Australia & New Zealand Banking Group Ltd said before the announcement.
Policy makers are trying to navigate the end of a once-in- a-century mining boom by relying on services like tourism and education to pick up some slack via low rates and a currency that’s weakened from its 2013 peak. But while Australia’s economy has grown faster than the central bank predicted, core inflation and wage growth are both at record lows and the Aussie has rebounded about 10 percent from its mid-January trough.
The driver of the Australian dollar’s recent strength has been U.S. policy makers’ hesitancy to tighten policy since December while Europe and Japan have moved to negative rates and extended bond-buying programs. The global growth picture is further clouded by uncertainty over the impact of Britain voting to quit the European Union.
In Australia, the central bank may have to go it alone if further stimulus is required in the economy. The government has made it clear its priority is reining in a budget deficit to protect the country’s AAA rating, meaning there’s unlikely to be additional spending to promote growth.
“Central banks everywhere would like extra stimulus to come from lower currencies and more infrastructure spending,” Michael Blythe, chief economist at Commonwealth Bank of Australia, said before the decision. “Both are beyond the ability of the RBA to deliver -- they remain the policy maker of last resort.”
There may also be more clouds on the horizon. Data last week showed mortgage growth slowed to a two-year low and lending to businesses and consumers fell 0.2 percent in June, the weakest result since late 2012. Housing and construction had been booming from record-low rates, while the RBA looks to business lending as a guide on whether moribund investment outside the mining industry might be set to pick up.
In minutes of last month’s meeting, the board also signaled concern about the labor market. It noted that jobs growth had been driven by part-time roles in 2016, while full-time employment had retraced some earlier strong gains. But the underemployment rate had not fallen to the same extent as unemployment for about the last year.
The central bank will release its quarterly update of economic growth and inflation forecasts on Friday. The previous report was in May, when the RBA last cut.
“We expect the forecasts to show inflation running below the RBA’s 2-3 percent target band out to mid-2018 and remaining near the bottom of the band thereafter,” Blythe said.
“Such an extended period of very low inflation leaves us inclined to think that the risks still lie with lower rates after August.” He predicts another cut in November. - Bloomberg
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