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RBA minutes: Growth will strengthen when impact of mining boom ebbs

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 15, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Mumbai) - Minutes of Reserve Bank of Australia’s December 1st meeting when it had held rates steady at 2 per cent was released today. The RBA sees GDP growth at 2.5 per cent in 2015/16, 2.75 per cent in 2016/17, 3.0 per cent through to 2018/19. In the transcript the central bank highlighted that the domestic economy is strengthening and the outlook for retail sales improved. The minutes noted there is spare capacity in the economy. It however said that the economy is still in that phase where the impact of the mining boom is still subsiding. When this impact ebbs output growth will “strengthen gradually over the next two years”. The Board, the minutes stated will assess the outlook from time to time and judge if the current state of monetary policy is most effective for sustaining growth.

    The RBS has however flagged China worries. It has mentioned that China outlook continues to remain shrouded by industrial overcapacity and also the stock of unsold homes. The slowdown in China, which is Australia’s most important trading partner has hurt the economy. Revenues have dipped on falling commodity prices and this had adversely impacted Australia’s budget position since May 2015. 2015/16 budget deficit is forecast to come in at AUD37.4 billion as compared to A$35.1 billion seen in May. 2016/17 budget deficit will likely tighten to stand at A$33.7 billion; while 2017/18 deficit at A$23 billion. The budget deficit will further reduce to A$14.2 billion in 2018/19

    Australia’s rebalancing away from the resource sector will likely be supported continued strong building and construction in Australia’s housing sector. Low rates have supported home building. Business surveys pointed to improvement in non-mining sectors. Growth in net service exports which remained consistent with the depreciation of the exchange rate supported the activity in the non-mining sector. Mining capex continues to fall.

    The pace of household consumption has shown significant increase, helped by lower rates. “Information from liaison contacts suggested that retail conditions had been more favourable recently and a range of other indicators pointed to some strengthening in the pace of household consumption growth since the middle of the year,” the minutes said.

    The RBA forecast CPI inflation at 2% in 2015/16, then 2.25 pct in 2016/17. Core inflation rates will likely remain stable, but below the central bank’s target. Inflation remains lower than the central bank’s expected target and this may afford some scope for further easing if needed.

    The unemployment rate dropped 5.8 per cent in November. Employment rate has been steady for some time now indicating strengthening of the labor market. Unemployment is expected at 6% in 2015/16 and at 5.75 pct by 2017/18. The board is confident the employment market would continue to look healthy. It noted “Measures of job vacancies and advertisements pointed to continued growth in employment over the coming months.”

    The overall business conditions look healthy, the minutes observed. It cited surveys which showed “business conditions continued to improve and were clearly above average”. Business credit also increased further in October.

    More rate cuts unlikely

    The central bank firmly believes that that its accommodative policy has supported growth as the low rates have spurred household consumption and dwelling investment. The Australian Dollar has been adjusting to significant declines in key commodity prices. In the process it has boosted demand for domestic production. The growth in production has further strengthened employment. On the other hand, resource exports have continued to make a significant contribution to growth.

    Given that the RBA thinks the economy is on a relatively strong footing, there thus seems little possibility of a rate cut in the near future. The RBA however has left the door open for more cuts in the event of unforeseen events which might threaten to weaken the economy. Low inflation might also lead the central bank to consider further rate cut. As of now, however such a rate cut seems unlikely. At the same time a rate hike is also not on the cards because of the support the loose monetary policy lends to the economy.
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