Australia central bank silent on outlook as it holds rates


  • Economy Premium
  • Tuesday, 05 Jul 2016

SYDNEY: Australia's central bank kept interest rates at an all-time low of 1.75% on Tuesday, a widely expected decision given political uncertainty at home and abroad and a lack of timely data on domestic inflation.

The Reserve Bank of Australia (RBA) ended its July policy meeting with no guidance on whether it might ease any further, disappointing some who had looked for an explicit easing bias.

"Further information should allow the Board to refine its assessment of the outlook for growth and inflation and to make any adjustment to the stance of policy that may be appropriate," was the dry conclusion of RBA governor Glenn Stevens.

Political uncertainty at home and abroad had argued for keeping the policy powder dry for now.

Vote counting continues after elections in Australia, leaving the country without a government, while scars from Britain's decision to leave the European Union are still fresh.

Yet a Reuters poll of 37 economists found the majority still looked for the central bank to cut in August, while markets put the probability at 50:50.

With further easing seen likely in Europe and Japan and greatly diminished prospects of a tightening in the United States, the RBA will be under pressure to cut if only to limit any appreciation in the local dollar.

ALL EYES ON INFLATION 

Official figures for second-quarter inflation are also due on July 26 and another weak reading would greatly bolster the case for another rate cut. Inflation has been running at just 1.5%, uncomfortably below the RBA's 2% to 3% target band.

The impact of poor pricing power was clear in the retail sector as data from the Australian Bureau of Statistics showed sales up a slim 0.2% in May, not much better than April. That was disappointing given the retail industry has sales of A$290 billion a year and is the second biggest employer with 1.25 million workers.

Fierce competition from new entrants from offshore has depressed prices for everything from food to clothes. That eats into dollar revenues even as more goods are sold.

"I anticipate we'll be dropping prices over the course of the next 5 years," John Durkan, managing director of the giant Coles supermarket chain said recently. "I don't see prices increasing during that period." 

It is this disinflationary sea change that prompted the RBA to cut rates in May.

Weak prices have also been a feature of Australia commodity exports in the last couple of years, with ample supplies hurting iron ore and coal in particular.

Yet the hundreds of billions of dollars spent on expanding mines means the country is shipping more of the stuff than ever, providing a crucial boost to real economic growth. Exports alone accounted for almost half the 3.1 percent growth enjoyed in the year to March.

Trade data for May out on Tuesday showed exports rose 1% as shipments of iron ore and coking coal both gained in the month. Exports to China were up almost 10% on May last year despite worries about sluggish growth there. - Reuters

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