Australia Faces Risks as Central Bank Sees Rates on Hold

(Bloomberg) -- Australia’s economy faces a trifecta of risks that could disrupt household spending and the central bank’s outlook for faster economic growth and falling unemployment.

In minutes of its last policy meeting for the year, the Reserve Bank struck a slightly dovish tone. It noted a “generalized tightening of credit availability” in the economy even as it stuck to the script of gradual improvement eventually culminating in an interest-rate increase.

“The outlook for household consumption continued to be a source of uncertainty because growth in household income remained low, debt levels were high and housing prices had declined,” the RBA said Tuesday in Sydney. “Members noted that this combination of factors posed downside risks.”

Plunging property prices are beginning to overshadow Governor Philip Lowe’s scenario of a sustained expansion that tightens the labor market and gradually lifts inflation. Sydney’s market has slumped 10 percent with little end in sight, and banks facing increased scrutiny are shying away from lending, threatening to exacerbate the downturn.

Australia Faces Risks as Central Bank Sees Rates on Hold

“The sentiment in these minutes is somewhat less confident about the Australian economy,” said Bill Evans, chief economist at Westpac Banking Corp. “Taking into account the attention given to the credit, housing, consumer and external risks, these minutes should be interpreted more dovishly than we have seen over the course of 2018.”

Traders are pricing in no interest-rate increase for next year -- indeed, the market shows a very slight chance of a cut.

Australia is in the unusual position of solid growth and declining unemployment, amid a record-low 1.5 percent cash rate, at a time when property is tumbling in its two biggest cities. The OECD said while housing is on track for a soft landing, it also warned those are exceedingly rare and authorities should prepare for the worst.

The RBA noted that liaison with developers indicated demand for new housing in eastern Australia had eased “and some developers reported that this decline in demand had become more pronounced.” It said “demand for off-the-plan apartments had declined significantly since mid-2017.”

This also poses a threat to consumption as fewer people setting up house means less demand for big ticket items like furniture and electronics, hurting already weak retailers.

The RBA met Dec. 4, a day before the release of third- quarter GDP that came in weaker than forecast as household spending slowed sharply. That made the bank’s optimistic forecasts for a “more than 3 percent” increase in growth and average consumption stand out in the minutes. The economy actually expanded an annual 2.8 percent in the period.

Other Key Comments:

  • It “continued to be difficult to gauge underlying momentum” in China’s economy
  • Australian unemployment was likely to fall further as the economy expanded at an above-trend pace
  • Growth in housing credit was “very weak” for investors and had also eased for owner-occupiers
  • House prices in Perth and Darwin have returned to levels seen a decade earlier
  • The RBA board discussed a paper on longer-term trends in the division of aggregate income between labor and capital

The central bank’s board next meets Feb. 5 and will provide its next quarterly update of growth and inflation forecasts on Feb. 8.

©2018 Bloomberg L.P.