Glass half full for economy: RBA

9.Glass half full for economy RBA

By Lucy Hughes Jones
Sydney
(Australian Associated Press)

The Reserve Bank seems more at ease with the state of the economy, signalling that interest rates are unlikely to move for now.

The RBA cut the cash rate to a historic low of two per cent in May and has left it there at its subsequent meetings.

In the minutes of its August meeting, released on Tuesday, the central bank said domestic economic activity had been more positive over recent months, but warned it would keep an eye on economic conditions to asses any future decisions.

Commonwealth Bank economist Gareth Aird says the RBA left plenty of clues on its policy stance, with an optimistic reading of the labour market, the exchange rate and the level of trend growth.

“The distinct lack of forward guidance, coupled with the RBA’s changes to its narrative around the unemployment rate and the Australian dollar, suggest that the risk of a near term rate cut is low,” he said.

The bank said very low wage growth and slower population growth has kept a lid on unemployment, with the jobless rate set to peak somewhere below its previous forecast of 6.5 per cent before declining in 2017.

“A flat unemployment rate is normally consistent with no changes to policy,” Mr Aird said.

“In addition, the Australian dollar now looks quite content to be in the low 70s which we view as the sweet spot for the RBA.”

The exchange rate has fallen to its lowest level since 2009 in the past month, and further depreciation was expected to kickstart the economy through more competitive export prices, the bank said.

The Aussie has slipped five per cent against the greenback and four per cent against most of Australia’s major trading partners’ currencies during the past month.

Mr Aird said the plunging currency has boosted more labour-intensive industries like tourism.

“Services exports have risen steadily over the past two years while services imports have declined,” he said.

However JP Morgan economist Ben Jarman says the RBA’s constructive sentiment is outdated, as it doesn’t take into account massive devaluations of the Chinese yuan last week.

“That will influence the future path (of the Australian dollar against the Trade Weighted Index),” he said.

Mr Jarman said recent soft China activity data also throw into question the RBA’s view that “downside risks to the outlook for Chinese growth identified over the last year had receded somewhat.”

While the central bank tipped non-mining investment to remain subdued for some time, it noted profits in this sector had increased and business conditions were above average.

“Very low interest rates were (also) continuing to support strong growth in dwelling investment and consumption,” the RBA said.

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