Australia's central bank holds rates, sounds less upbeat on growth - Metro US

Australia’s central bank holds rates, sounds less upbeat on growth

By Swati Pandey

By Swati Pandey

SYDNEY (Reuters) – Australia’s central bank left interest rates at record lows on Tuesday, as expected, and sounded less confident that the economy would grow at 3 percent or more this year, in another sign rates will likely remain on hold for months to come.

The Reserve Bank of Australia (RBA) expects the country’s gross domestic product (GDP) to “grow faster in 2018 than it did in 2017”, as it entirely removed reference to expectations of “above 3 percent” growth over the next couple of years.

The change in rhetoric comes as analysts downgrade forecasts for fourth-quarter GDP, due Wednesday.

A Reuters poll of analysts last week showed economists expect GDP to have expanded by 0.6 percent on quarter and 2.5 percent on year in the December quarter. However, recent soft indicators have prompted analysts to trim these expectations to rises of around 0.5 percent and 2.4 percent, respectively.

“The RBA has definitely softened its language around growth,” said Tom Kennedy, Sydney-based senior economist at JPMorgan. “I think the change means gradually and very slowly they’re stepping away from the 3 percent target,” he added.

“Wage growth has been low, consumption has been really weak since mid-2017, net exports have been weaker than RBA’s expectations. So when you add up all the bits and pieces you get a small figure.”

Analysts are divided evenly on the chance of a rate hike by December, while interest rate futures <0#YIB:> are not fully priced for a 25-basis point rise until early 2019.

The RBA is one of the less hawkish central banks in the developed world. The U.S. Federal Reserve is expected to raise rates at least three times this year and the European Central Bank is seen stepping back from its massive asset buying program soon.


Tuesday’s figures from the Australian Bureau of Statistics (ABS) showed a drop in rural exports and a jump in consumer and oil imports, shaving 0.5 percentage points off gross domestic product (GDP) in the quarter.

As a result, the country’s current account deficit widened to its largest in over a year to A$14 billion ($10.89 billion).

The RBA acknowledged the slowdown in exports in the fourth quarter, calling it a temporary blip.

Adding to the dour mood, retail sales for January rose a tepid 0.1 percent when analysts had looked for a 0.4 percent gain due to weakness in clothing and department stores. Sales had dipped 0.5 percent in December.

Consumer spending accounts for around 57 percent of GDP.

Australia’s brick-and-mortar retailers have been struggling amid cut-throat competition and as relentless price discounts fail to entice customers facing paltry wage growth and mountains of debt.

One bright spot was the surprisingly strong spending by Australia’s government, which helped offset the drag from weather-dampened exports.

Tuesday’s data showed government spending rose 1.7 percent in the fourth quarter to an inflation-adjusted A$83.16 billion ($64.67 billion) lifting potential for growth.

Also contributing to overall activity in the fourth quarter was remarkable strength in retail and car sales.

“The GDP partials confirm a composition of growth in Q4 that is unlikely to continue in 2018,” said RBC economist Sue-Lin Ong.

“Firmer domestic demand with a bounce in consumption will be evident while net exports will weigh on growth. We expect that to shift in 2018,” Ong added, citing strong global activity and higher LNG exports.

“A softer housing market and subdued household consumption will likely temper domestic private demand. We retain below consensus household consumption forecasts for 2018 and 2019.”

(Reporting by Swati Pandey; Editing by Simon Cameron-Moore and Sam Holmes)

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