Aussie Central Bank Stranded as Reflation Skips Ex-Star Economy

(Bloomberg) -- Australia is emerging as an outlier in the developed-world story of faster economic growth and inflation, pushing the central bank to the sidelines as flat wages and a strengthening currency keep prices in check.

Reserve Bank of Australia Governor Philip Lowe and his board will keep interest rates unchanged at a record low for an 18th month at Tuesday’s policy meeting, the year’s first, money market bets and economists’ forecasts show. Neither see a serious chance of tightening before the fourth quarter, while a vocal minority expect policy makers will stand pat all year.

“Strong global growth and the long-awaited recovery in global inflation have increased the risk that central banks turn more hawkish,” said Tom Kennedy, an economist at JPMorgan Chase & Co. in Sydney. “The Australian economy is facing a different set of challenges and our expectation is for the RBA to leave the cash rate unchanged at 1.5 percent across the forecast horizon.”

The spoils of a record hiring spree have been partly offset by rapid population growth, with the jobless rate still half a percentage point above assumed full-employment and wages going nowhere. While business investment has turned, the adjustment from the fat years of a China-fueled mining boom has dragged on that recovery compared with global peers.

Moreover, after almost doubling in response to RBA rate cuts, Sydney house prices have started to slide as macroprudential policies deter investors. With a lack of pricing power in the economy -- and Amazon.com Inc. predicted to spur further retail deflation -- there’s little pressure on policy makers to act.

Also constraining the central bank is the currency’s 5 percent appreciation between the last board meeting in December and Feb. 2. That’s slicing into exporters’ margins as local products become more expensive and cutting the cost of imports, further compressing inflation.

The RBA targets average inflation of 2 percent to 3 percent over time and data last week showed an annual reading of 1.9 percent in the fourth quarter. Adam Boyton, chief Australia economist at Deutsche Bank AG, notes price growth was very “narrowly based”; excluding gasoline, tobacco, health and education and utilities, inflation last year would have been 0.6 percent, he estimates.

Traders were similarly unimpressed. Following the release of the data, they slashed bets on an August hike by 10 percentage points -- they’re now pricing in November as the most likely month for a tightening, with a 73 percent chance. The median estimate of economists is for a fourth-quarter rate rise.

Still, data Monday signaled the Australian labor market’s strength last year is likely to carry into this one. Job advertisements jumped 6.2 percent in January, the biggest gain since 2010 and erasing a drop in December, according to a survey by Australia & New Zealand Banking Group Ltd.

Has-Been?

As central banks around the world wind back monetary stimulus and a synchronised global upswing takes hold, Australia -- a world-beating economy during the mining boom -- is becoming something of a laggard.

Global GDP growth has averaged 3.3 percent since 2016, the strongest and most persistent expansion since after last decade’s financial crisis, according to JPMorgan. In contrast, Australia has averaged 2.5 percent since mid-2016, a slowdown from preceding years mainly due to the fall in mining investment.

While that weight has now lifted, a borrowing binge fueled by easy policy that spurred a Sydney property boom has left household debt at 188 percent of income, a record that is likely to constrain consumption Down Under.

“Australian real GDP will continue to track below potential and lag behind global peers,” Kennedy said. “Underpinning this forecast is our view that weak per-capita income growth and balance sheet constraints will continue to challenge consumers.”

--With assistance from Garfield Reynolds

To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net.

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Chris Bourke

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