The Reserve Bank of Australia
(RBA) released its Statement on Monetary Policy on August 8th.
Australia is still tackling
the forced transition from a mining based economy to one that is supported by
domestic consumption due to the downturn in demand for Iron Ore, particularly
from China, and a consequent collapse of commodity prices.
The key factors in whether or
not this transition will be relatively seamless, or traumatic, are discussed in
the monetary policy statement. GDP growth is expected to be a little below
average in 2014/15; a pick-up in dwelling investment is already underway (fears
of a property bubble are not mentioned); consumption appears to have grown at
only a moderate rate over the year to date but the historically low (by Aussie
standards) interest rate and some improvement in labour market conditions is
expected to help here; the unemployment rate is expected to remain elevated and
there is slack in the labour market, so wage growth is anticipated to remain
low; and inflation pressures are likely to remain subdued.
And, once again, mining
investment is expected to fall sharply from its current levels and is expected
to be replaced by growth in non-mining investment.
Many imponderables ahead
It is obvious that while the
Australian authorities have a clear plan for dealing with the mining downturn
and enjoy significant credibility in their ability to manage the economy, there
is still much that is dependent on certain things happening on schedule. The
one ace they have in the hole, so to speak, is the exchange rate, and this is
the subject that concerns us most. While a base rate of 2.5% might be extremely
low by Australian historical standards, it is still very far above the almost
zero rate that has been brought into play in most other major global economies.
This means that a rate reduction is something the RBA has to fall back on if
the stated scenarios do not pan out as hoped.
And any expectation by the
market that this is about to become a probability will be bad for the value of
the Aussie dollar.
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