Australia Holds Rate as Better Global Outlook Boosts Commodities

aussieA person holds Australian dollar banknotes of various denominations for a photograph in Sydney, Australia, on Thursday, July 24, 2015. Photographer: Brendon Thorne
  • Australia Holds Rate as Better Global Outlook Boosts Commodities

Australia’s central bank left interest rates unchanged as a stronger global backdrop boosts commodity prices, bringing a windfall to an economy still grappling with weak inflation.

Governor Philip Lowe and his board kept the cash rate at 1.5 percent as forecast by 27 of 28 economists — one predicted a cut. The Reserve Bank of Australia also reaffirmed its forecasts, predicting the economy to rebound after an unexpected contraction in the third quarter and headline inflation to rise above 2 percent this year.

“The bank’s central scenario remains for economic growth to be around 3 percent over the next couple of years,” Lowe said in his statement. “Growth will be boosted by further increases in resource exports and by the period of declining mining investment coming to an end. Consumption growth is expected to pick up from recent outcomes, but to remain moderate.”

The Australian dollar rose, buying 76.70 U.S. cents at 3:12 p.m. in Sydney, compared with 76.45 cents before the decision.

Lowe is relying on record low rates, increased resources exports and the end of an unwinding of mining investment that’s dragged on growth to support the economy. Australia has enjoyed an unexpected jump in iron ore and coal prices that boosts national income, though a concurrent strengthening of the currency is a hindrance for services industries.

The RBA said an appreciating currency “would” complicate the economy’s adjustment from the mining boom, slightly upgrading the line from the previous “could.” It also dropped a “somewhat” before its line on labor market indicators being “mixed”. The bank noted “considerable variation” in jobs indicators across the country as the mining states of Western Australia and Queensland weaken and the east coast strengthens.

Financial Stability

“The forward-looking indicators point to continued expansion in employment over the period ahead,” it said, more positively. The RBA concluded that “taking account of the available information, and having eased monetary policy in 2016, the board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.”

Lowe, since taking charge in mid-September has elevated financial stability in an environment of rising asset prices fueled by low rates. Inflation remains important, just not the immediate trigger for policy moves that it’s been in the past.

The bank was upbeat on China and the global outlook, predicting above-trend growth in a number of advanced economies.

“In China, growth was stronger over the second half of 2016, supported by higher spending on infrastructure and property construction,” Lowe said. “This composition of growth and the rapid increase in borrowing mean that the medium-term risks to Chinese growth remain. The improvement in the global economy has contributed to higher commodity prices, which are providing a boost to Australia’s national income.”

Tuesday’s statement also touched on the global reflation theme: “headline inflation rates have moved higher in most countries, partly reflecting the higher commodity prices.”

Reflecting the commodity upswing, the Aussie dollar climbed more than 5 percent in January and has been strong against the currencies of key trade partners like China, Korea and Japan, reducing the economy’s competitiveness. That hampers the transition from a reliance on mining to services like tourism and education.

The central bank releases a quarterly update of its growth and inflation forecasts Friday.

About the Author

Samed Olukoya
Samed Olukoya is the CEO/Founder of investorsking.com, a digital business media, with over 10 years' experience as a foreign exchange research analyst and trader. A graduate of University of East London, U.K. and a vivid financial markets analyst.

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