Australian central bank faces decisive week for its policy | Investment News

FILE PHOTO – A worker delivering packages pushes a cart in front of the Reserve Bank of Australia building in central Sydney, Australia on March 7, 2017. REUTERS / David GrayReuters

By Wayne Cole and Swati Pandey

SYDNEY (Reuters) – The Australian central bank is holding its first annual policy meeting in the face of a transformed world, not for the better.

Unwelcome economic news at home and abroad is calling into question the stubborn optimism of the Reserve Bank of Australia (RBA) in the face of growth and its repeated insistence on the next rate hike. ;interest.

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 is likely to take a more neutral perspective and get rid of its long-held view that the next interest rate shift is on the rise," Sherwood added.

"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.

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: Housing prices in Australia are falling but household debt remains extremely high – https://tmsnrt.rs/2sX8qx3)

The magnitude of the slippage is weighing on consumer wealth, with Australian housing stock valued at A $ 6.8 trillion (US $ 4.94 trillion), nearly four times the gross domestic product (GDP). ) annual of 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 fall 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 drop of about 25% spread over the next two months. by 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 this goes in the direction of our opinion that the RBA will reduce the key rate to 1% by the end of the year.

(CHART: Household saving rate decreases, consumption declines, growth slows – https://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.

The Fed's dovish round, however, would not have been as well received by the RBA, which was counting on continued rises from the Fed to keep upside 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.

Until now, Governor Lowe has had a half full glimpse of the Australian economy, estimated at A $ 1.8 trillion, 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 Australia's main exports – iron ore and coal – have weathered the country's commodity price index, with a peak of 6½ years and leading indicators of demand for labor. continue to indicate a further decline in the unemployment rate.

(GRAPHIC: The unemployment rate in Australia is not low enough to fuel wage growth and inflation – https://tmsnrt.rs/2t05L5W)

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

"Generally, when house prices fall, a lot of problems occur elsewhere," said ANZ chief economist Richard Yetsenga, noting that most of the slowdowns of the past had been 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."

Copyright 2019 Thomson Reuters.