Australian central bank faces a decisive week

SYDNEY (Reuters) – The Australian central bank is holding its first policy meeting of the year against a redesigned world, not for the better.

Unwelcome economic news at home and abroad is challenging the stubborn optimism of the Reserve Bank of Australia (RBA) and its repeated insistence on the next rise in interest rates.

Investors have already considered the possibility of a rate cut this year and are well aware that earlier easing has never stopped at a single cut.

"This will be a very important week for investment markets in Australia," said Matthew Sherwood, head of investment strategy for Perpetual Investments.

"I think the bank will probably take a more neutral perspective and remove its long-held view that the next interest rate change is on the rise," added Sherwood.

"If that happens, it will put further downward pressure on Australian sovereign yields, while the Australian stock market, with a return of 60%, should react very positively."

Tuesday's RBA board meeting, which is expected to keep the policy unchanged, is just one of the central bank's major events this week. Governor Philip Lowe delivered a much-anticipated speech on Wednesday and the RBA released Friday its latest quarterly outlook on the economy.

Markets have a crucial interest in whether the RBA's communications are blatantly maintaining or omitting previous indications that the next policy change would likely be a rate hike.

Investors are already banking on a political turn with futures, which implies a 50% chance that cash rates will be reduced by a quarter of a point by the end of the year. Rates have hit a record 1.5% since the last easing of mid-2016, the longest period of inaction in modern history.

If past is prologue, no cut would be singular. The RBA is released twice in 2016, twice in 2015 and twice in 2013.

HOME LOAN

On the domestic front, housing is the epicenter of concern, as housing price declines of several months accelerated in the New Year, resulting in greater losses than during the global financial crisis.

A much-monitored report from real estate consultant CoreLogic showed that real estate prices in Sydney had dropped more than 10 percent from the peak reached in 2017, wiping out two years of gains.

Melbourne is not far behind, as excessive construction in the apartments sector leaves the market flooded with empty properties.

(GRAPHIC: Australian housing prices moderate but household debt remains extremely high – tmsnrt.rs/2sX8qx3)

The magnitude of the slide weighs on consumer wealth, with Australia's housing stock estimated at A $ 6.8 trillion (US $ 4.94 trillion), nearly four times the annual gross domestic product (GDP) from the country.

Part of the withdrawal was intentional and necessary, as regulators sought to calm an overheated market with tighter credit restrictions for banks.

Yet, stunned by a series of scandals, banks have gone further by hardening their own lending criteria and increasing mortgage rates for many products, especially for investors.

This pressure will not be alleviated anytime soon as the outcome of an extensive financial sector survey is expected on Monday and should include a whole series of unpleasant recommendations for banks.

"The decline in real estate prices is a perfect storm," said Shane Oliver, chief economist at AMP Capital, who fears that Sydney and Melbourne will experience a decline of around 25% until 2020.

"This will depress consumer spending because the wealth effect is the opposite," he added. "This is also a negative factor for the banks and therefore corresponds to our opinion that the RBA will reduce the key rate to 1% by the end of the year.

(CHART: Household saving rate decreases, consumption slows, growth slows – tmsnrt.rs/2Bd3vfU)

The headaches of the RBA are not only of local origin. Global growth is clearly worsening, under the impetus of China and Europe, while the Sino-US trade war threatens the financial markets.

The US Federal Reserve was so frightened that it virtually abandoned its plans for further rate hikes last week, a stunning turnaround that spurred stocks and bonds around the world.

However, the Fed's dovish round would not have been as well received by the RBA, which was counting on continued Fed hikes to keep up the downward pressure on the Australian dollar. A weaker local currency is a huge economic multiplier for Australia since much of its commodity exports are denominated in US dollars.

Any decline in the Aussie is directly related to higher export earnings, corporate profits and tax revenues.

Instead, the Australian dollar has skyrocketed since the Fed changed tone and further gains would include a tightening of domestic conditions against which the RBA might have to work.

"Ah, but …"

To date, Governor Lowe has had a half-full glimpse of Australia's $ 1.8 trillion Australian economy, which is in its 27th year of expansion without a recession.

Which also contributes to optimism, the unemployment rate has reached a low of 5.0 percent over 6 ½ years and the slowdown brought about by the end of the boom in mining investment, which is occurring once per generation, also fades.

Prices of major Australian exports – iron ore and coal – held up well in the country's commodity price index, with a peak of 6½ years and leading indicators of labor demand. continue to drive down the unemployment rate.

(GRAPHIC: Australia's unemployment rate is not low enough to fuel wage growth, inflation – tmsnrt.rs/2t05L5W)

And the slowdown in the housing market is not totally untimely given the record debt of households.

"Generally, when housing prices go down, a lot of problems occur elsewhere," said ANZ chief economist Richard Yetsenga, noting that most of the past slowdowns were recorded in the past few years. recession.

Instead, this decline in prices was caused largely by a tightening of prudential policy, not by any rate hikes or a marked slowdown in the economy.

"On this occasion, monetary and fiscal policies actually increase demand, whereas historically, politics tended to tighten when real estate prices began to fall."

Previous declines in housing have also been badociated with a significant slowdown in government spending. However, since 2015, spending has increased by 4 to 6% per year.

"As the federal budget is about to return to a surplus, spending could be even stronger."