- Australia Holds Rates as Inflation Speeds Up, Stimulus Signs Mount
Australia kept interest rates unchanged as faster inflation and signals of looming fiscal stimulus combine with an upswing in global growth.
“Above-trend growth is expected in a number of advanced economies,” Reserve Bank of Australia Governor Philip Lowe said in a statement announcing the decision Tuesday. “The improvement in the global economy has contributed to higher commodity prices, which are providing a significant boost to Australia’s national income.”
The central bank also left the cash rate at a record-low 1.5 percent — as expected by all 28 economists surveyed by Bloomberg — to allow regulatory rules targeting riskier property loans to take effect amid hot housing markets in Sydney and Melbourne.
The lending crackdown is designed to discourage households — already among the world’s most indebted — from gearing up further after east-coast property prices doubled since 2009. The RBA fears that, in a weak wage growth and with inflation still subdued, over-leveraged borrowers could slash spending in an economy where consumption accounts for more than half of output.
“Growth in housing debt has outpaced the slow growth in household incomes,” Lowe said. “The recently announced supervisory measures should help address the risks associated with high and rising levels of indebtedness.”
The Australian dollar edged higher, buying 75.42 U.S. cents as 3:18 p.m. in Sydney compared with 75.37 cents prior to the decision.
“The bank’s forecasts for the Australian economy are little changed. Growth is expected to increase gradually over the next couple of years to a little above 3 percent,” Lowe said in a preview of the central bank’s quarterly update due Friday. “Growth in consumption is expected to remain moderate and broadly in line with incomes. Non-mining investment remains low as a share of GDP and a stronger pick-up would be welcome.”
Australia’s government has given itself leeway to finance projects like road and rail by redefining debt in its May 9 budget. Treasurer Scott Morrison is seeking to distinguish between good debt — used for productivity enhancing or income-generating infrastructure — and bad debt used to fund things like welfare and health. That would ease the constant pressure on the RBA to support the economy since late 2011.
Stimulus is needed as wage growth remains at a record low, a product of the economy adjusting to regain competitiveness as the unwinding of a mining investment boom nears its completion. While inflation returned to the bottom end of the RBA’s 2 percent to 3 percent target in the first three months of the year after spending nine quarters below it, the key core measure didn’t.
Moreover, there’s little sign on the horizon of fatter pay packets to fuel consumer prices as the jobless rate holds at 5.9 percent and under-employment remains elevated, signaling plenty of slack in the labor market.
“The unemployment rate is expected to decline gradually over time,” said Lowe. “Wage growth remains slow and this is likely to remain the case for a while yet.”
The nation’s retailers have also been trapped in a deflationary environment as global brands entering the market drive down prices; they are likely to have to steel themselves anew following the announcement Amazon.com Inc. is heading Down Under.
On the upside, Australia is the most China-dependent economy in the developed world and is benefiting from demand in the world’s No. 2 economy for everything from commodities to education to tourism. Australia had a record 1.2 million visitors from China last year.
Business conditions have also remained strong, even as the Aussie dollar has risen more than 4 percent this year, one of the best performers in the Group of 10 currencies tracked by Bloomberg. That’s a headwind for services like tourism and education that must compete internationally.
The governor reiterated his long standard comment that an appreciating exchange rate “would complicate” the economy’s transition from a mining investment boom.
“Taking account of the available information, the board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time,” Lowe said in a concluding paragraph that was unchanged from last month.
Oil Prices Recover Slightly Amidst Demand Concerns in U.S. and China
Oil Prices Continue Slide as Market Skepticism Grows Over OPEC+ Cuts
Global oil markets witnessed a continued decline on Wednesday as investors assessed the impact of extended OPEC+ cuts against a backdrop of diminishing demand prospects in China.
Brent crude oil, the international benchmark for Nigerian crude oil, declined by 63 cents to $76.57 a barrel while U.S. WTI crude oil lost 58 cents to $71.74 a barrel.
Last week, the Organization of the Petroleum Exporting Countries and its allies, collectively known as OPEC+, agreed to maintain voluntary output cuts of approximately 2.2 million barrels per day through the first quarter of 2024.
Despite this effort to tighten supply, market sentiment remains unresponsive.
“The decision to further reduce output from January failed to stimulate the market, and the recent, seemingly coordinated, assurances from Saudi Arabia and Russia to extend the constraints beyond 1Q 2024 or even deepen the cuts if needed have also fallen to deaf ears,” noted PVM analyst Tamas Varga.
Adding to the unease, Saudi Arabia’s decision to cut its official selling price (OSP) for flagship Arab Light to Asia in January for the first time in seven months raises concerns about the struggling demand for oil.
Amid the market turmoil, concerns over China’s economic health cast a shadow, potentially limiting fuel demand in the world’s second-largest oil consumer.
Moody’s recent decision to lower China’s A1 rating outlook from stable to negative further contributes to the apprehension.
Analysts will closely watch China’s preliminary trade data, including crude oil import figures, set to be released on Thursday.
The outcome will provide insights into the trajectory of China’s refinery runs, with expectations leaning towards a decline in November.
Russian President Vladimir Putin’s diplomatic visit to the United Arab Emirates and Saudi Arabia has added an extra layer of complexity to the oil market dynamics.
Discussions centered around the cooperation between Russia, the UAE, and OPEC+ in major oil and gas projects, highlighting the intricate geopolitical factors influencing oil prices.
U.S. Crude Production Hits Another Record, Posing Challenges for OPEC
U.S. crude oil production reached a new record in September, surging by 224,000 barrels per day to 13.24 million barrels per day.
The U.S. Energy Information Administration reported a consecutive monthly increase, adding 342,000 barrels per day over the previous three months, marking an annualized growth rate of 11%.
The surge in domestic production has led to a buildup of crude inventories and a softening of prices, challenging OPEC⁺ efforts to stabilize the market.
Despite a decrease in the number of active drilling rigs over the past year, U.S. production continues to rise.
This growth is attributed to enhanced drilling efficiency, with producers focusing on promising sites and drilling longer horizontal well sections to maximize contact with oil-bearing rock.
While OPEC⁺ production cuts have stabilized prices at relatively high levels, U.S. producers are benefiting from this stability.
The current strategy seems to embrace non-OPEC non-shale (NONS) producers, similar to how North Sea producers did in the 1980s.
Saudi Arabia, along with its OPEC⁺ partners, is resuming its role as a swing producer, balancing the market by adjusting its output.
Despite OPEC’s inability to formally collaborate with U.S. shale producers due to antitrust laws, efforts are made to include other NONS producers like Brazil in the coordination system.
This outreach aligns with the historical pattern of embracing rival producers to maintain control over a significant share of global production.
In contrast, U.S. gas production hit a seasonal record high in September, reaching 3,126 billion cubic feet.
However, unlike crude, there are signs that gas production growth is slowing due to very low prices and the absence of a swing producer.
Gas production increased by only 1.8% in September 2023 compared to the same month the previous year.
While the gas market is in the process of rebalancing, excess inventories may persist, keeping prices low.
The impact of a strengthening El Niño in the central and eastern Pacific Ocean could further influence temperatures and reduce nationwide heating demand, impacting gas prices in the coming months.
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