ADVERTISEMENT

Australia Keeps Rates on Hold at 1.5% Ahead of Federal Budget

Australia Stays on Policy Sidelines as Fiscal Injection in Play

(Bloomberg) --

Australia’s central bank remained on the sidelines Tuesday as it waits to analyze the economic impact of a fiscal injection designed to catapult Prime Minister Scott Morrison to a come-from-behind election victory.

Governor Philip Lowe kept the cash rate at 1.5 percent -- as expected by money markets and all-but-one economist -- saying in a statement: “Growth in household consumption is being affected by the protracted period of weakness in real household disposable income and the adjustment in housing markets,” while drought it also hurting farm output.

Australia Keeps Rates on Hold at 1.5% Ahead of Federal Budget

“Offsetting these factors, higher levels of spending on public infrastructure and an upswing in private investment are supporting the growth outlook, as is the steady growth in employment,” he said.

The Reserve Bank is under increasing pressure to end a 2-1/2 year pause as consumers hunker down in response to a property downturn that’s slashed household wealth. The government is set to unveil tax cuts and cash handouts in tonight’s budget to help voters caught between stagnant wages and one of the highest debt burdens in the developed world. It’s hoping the largess will secure enough backing for an unlikely win in May’s election.

Australia Keeps Rates on Hold at 1.5% Ahead of Federal Budget

The Australian dollar edged lower after the decision, trading at 70.68 U.S. cents at 6:30 p.m. in Sydney from 71.06 U.S. cents just before the release.

Three-year bond futures moved higher as traders speculated a slight wording change in the final paragraph of the RBA’s policy statement was indicative of an easing bias. Lowe said in the statement on Tuesday the central bank will “set monetary policy to support sustainable growth in the economy.” In March, he said keeping policy unchanged at that meeting “would be consistent with sustainable growth.”

Labor Market

The RBA has been confounded by contradictions showing up in the economy: growth slowed in the second half of 2018 to an annualized 1 percent from almost 4 percent in the first six months; at the same time, unemployment dropped to an eight-year low of 4.9 percent and government coffers are awash with tax revenue from strong employment.

“The GDP data paint a softer picture of the economy than do the labor market data,” Lowe said. “The Australian labor market remains strong.”

The central bank is likely to have to downgrade its economic forecasts when it releases next month’s quarterly update and markets are pricing in at least one rate cut this year with the possibility of a second; a number of top economists also see an easing.

What Bloomberg’s Economists Say

The Reserve Bank of Australia sounds no closer to cutting rates than it did a month ago. It refrained from putting a number on its growth forecast in its latest policy announcement -- a hint of caution. But importantly, it characterized the global outlook as “reasonable,” the Australian labor market as “strong” and the housing downturn as an “adjustment.”
-- Tamara Henderson, ASEAN, Australia and New Zealand economist
Click here to read the report

While Sydney house prices have slumped 13.9 percent from a mid-2017 peak and a credit squeeze is exacerbating the downturn, Lowe has been taking comfort from robust hiring and investment.

“Conditions remain soft and rent inflation remains low,” he said of housing. “Credit conditions for some borrowers have tightened a little further over the past year or so. At the same time, the demand for credit by investors in the housing market has slowed noticeably.”

Commodity Prices

The global backdrop isn’t providing much help -- although commodity prices have remained strong and exports are booming -- as Washington and Beijing still work toward a trade deal. Australia is the most China-dependent economy in the developed world, so the trade frictions only add to the cloud over the picture Down Under. Meantime, the Brexit saga continues to unsettle markets.

“Growth in international trade has declined and investment intentions have softened in a number of countries,” the RBA chief said. “In China, the authorities have taken steps to ease financing conditions, partly in response to slower growth in the economy.”

On the upside, the Aussie dollar has declined more than 10 percent from a January-2018 peak, providing some stimulus by making exporters more competitive. The Federal Reserve’s shift to a neutral stance could remove some of that depreciation momentum.

Australia Keeps Rates on Hold at 1.5% Ahead of Federal Budget

But this all gets back to the government’s fiscal injection. Treasurer Josh Frydenberg is expected tonight to forecast a A$4.8 billion ($3.4 billion) surplus in fiscal 2020, bringing to a close the longest stretch of budget deficits since at least 1970. He is now in a position to deploy significant cash to households to try to reverse the government’s consistent opinion poll deficit.

The RBA will want to see the scale of that spending and its potential impact on growth and inflation before deciding what to do next.

--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;Malcolm Scott at mscott23@bloomberg.net

©2019 Bloomberg L.P.