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News Analysis: Why Australian central bank cut cash rate to record low

English.news.cn   2013-05-09 09:00:49            

by Samuel Poon

CANBERRA, May 9 (Xinhua) -- The Reserve Bank of Australia (RBA) sliced another 0.25 of a percentage point off the official cash rate to 2.75 percent on Tuesday, following the European Central Bank.

The rate cut was largely aimed at making up for the Australian dollar's failure to depreciate in line with the economic fundamentals.

And there might be more to come.

In a statement, RBA Governor Glenn said that the RBA was using only some of the scope to ease monetary policy. This is being interpreted by the financial market as a reaffirmation of the bank' s easing bias.

ANZ Banking Group foreign exchange strategist Andrew Salter said he believed the aggressive easing path that the RBA is taking is in keeping up with the other central banks in the region.

"I think there's some substance to that but it's not the primary reason for the RBA to cut policy. The primary reason is the terms of trade is coming down, mining investment is peaking, the job creation from mining is unlikely to be there and so unemployment is edging higher," Salter said.

Both this rate cut and, more subtly, the possibility of another one, should put downward pressure on the exchange rate and help ease the economy's bumpy transition from the mining investment boom to a more conventional growth mix of housing construction, non-mining investment and mining export.

Of the three new growth engines, only mining export seems to be firing up effortlessly. Housing construction got off to a reasonable start in the December quarter but approvals for new construction appear to have plateaued. Non-mining investment is weak, and the last official survey suggested that the outlook for the coming financial year is for moderate growth at best.

The RBA board's decision suggests that the bank's new forecasts for the Australian economy offered little improvement on that outlook. Indeed, after the weaker than expected start to 2013, the board may have been concerned by the risk of a further increase in the unemployment rate.

The update to the bank's February forecasts will be made public with the release of the statement on monetary policy on Friday. But unless the bank was expecting either stronger growth through 2013, or an upward revision of the December quarter national accounts, the prospect, in the absence of a rate cut, would have been for unemployment to rise possibly to 6 percent by the end of the year.

With underlying inflation running at an annual rate of just 1.6 percent in the March quarter, there was nothing to stop the RBA from easing monetary policy.

The Australian data also has its bright spots, including the improvement in retail trading conditions after the terrible Christmas season, the beginning of the long-awaited acceleration of mineral export volumes, and the beginnings of a recovery in the housing market.

There are no signs of overheating in the real estate market. The growth in housing finance has been moderate, and house prices seem to have taken a breath, with the RP Data-Rismark home value index contracting 0.5 percent in April.

Employment growth is running at about half its long-term trend rate, and the unemployment rate has edged up to 5.6 percent. If there is no increase in the RBA's through-year growth forecast for 2013 and no upward revision of the December quarter national accounts, the unemployment rate stands a pretty good chance of reaching 6 percent this year.

However, the weak building approvals report for March, published on Thursday, may turn out to be the final straw for the RBA. It showed the value of residential approvals on a declining trend, with the number of approvals falling 5.5 percent in the month.

The RBA is counting on a revival of residential construction to help drive economic growth after investment by the resources sector plateaus.

Meantime, the current flow of international data continues to point to a slowing in global activity, with indicators of manufacturing activity in China and the United States in retreat, and South Korean exporters under pressure from the weaker Japanese yen.

The apparent acceleration of U.S. growth in the first three months of this year stands out as a bright spot in the data.

After stalling in the December quarter, the economic growth bounced back to an annual rate of 2.5 percent in the March quarter.

However, that still leaves growth over the six months well below the average rate for the recovery, and economists say there are question marks over the U.S. outlook.Among them is what some economists think is the unsustainable fall in household saving that financed the March quarter's lift in consumer spending.

At the same time, the turnaround in inventory investment that was at the heart of the March quarter's improvement could be just a return to normal inventory levels, rather than an indicator of accelerating future sales.

The new rate cut will be a tonic for consumer and business confidence, and, assuming it is passed on by the banks, it should be reflected fairly quickly in increased activity in the real estate market.

That should translate into an increase in housing construction, although the link between rising housing prices and construction is by no means mechanical.

However, there has been nothing that represents a red light to a further rate cut, and recently the green lights have outnumbered the amber ones.

Editor: Zhu Ningzhu
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