Confidence lifting but scope to ease: RBA

04-Confidence lifting but scope to ease RBA

By Lucy Hughes Jones


(Australian Associated Press)

The Reserve Bank seems unlikely to cut the cash rate thanks to economic benefits from the lower Australian dollar, but benign inflation means the door to further easing will be left ajar.

In the minutes of its November board meeting, the central bank gave an upbeat assessment on prospects for economic conditions after keeping the cash rate on hold at a record low of 2.0 per cent.

“Support provided to the economy following the depreciation of the exchange rate was particularly apparent in the sizeable contribution to growth from net service exports over the year to date,” the RBA said.

Looking ahead, board members believed the services sector would continue to boost growth in output.

JP Morgan chief economist Stephen Walters noted that board members expected the decline in mining investment will have run its course by the end of 2017.

“The bank’s tone (is) still largely `glass-half-full’ on the progress of the domestic growth rotation,” he said.

Commonwealth Bank of Australia senior economist John Peters believes the bank reinstated a soft easing bias to help ensure the Aussie dollar continues to track lower.

“The RBA clearly favours ongoing declines in the Australian dollar rather than more rate cuts to help engineer the economy’s transition and recovery from current sub-trend economic growth,” he said.

But Mr Peters said weak inflation gave the RBA scope for a rate cut if economic growth disappoints in 2016.

The minutes noted that inflation remained below target, highlighting the lower-than-expected inflation print in the September quarter.

Consumer prices rose 0.5 per cent in the September quarter for an annual rate of 1.5 per cent, and has now been below the RBA’s two to three per cent target band for a year.

“Inflation was forecast to be consistent with the target over the next one to two years, but somewhat lower than earlier expected,” the RBA said.

The RBA has since trimmed inflation forecasts, while being more positive on jobs growth and the housing market.

The minutes noted employment growth, concentrated in the household and business services sectors, had been stronger than expected this year.

Board members acknowledged household consumption is tipped to add significantly to growth in the next two years, thanks to relatively strong employment and low interest rates.

But they warned the unemployment rate was still high and wages growth sluggish.

Meanwhile, board members said tighter regulations were helping to contain the housing market, and removing any obstacles to cutting rates if necessary.

“Forward-looking indicators of housing activity generally pointed to further growth in dwelling investment, albeit at a moderating rate,” the minutes said.


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