Jane Foley, Research Analyst at Rabobank, suggests that all twenty forecasters in the Bloomberg economists’ survey expect the RBA to announce steady rates at tomorrow’s policy meeting.
“The strength of this conviction takes its cue from the statement of the last policy meeting on February 2 which states that “in Australia, the available information suggests that the expansion in the non-mining parts of the economy strengthened during 2015 even as the contraction in spending in mining investment continued. Surveys of business conditions moved to above average levels, employment growth picked up and the unemployment rate declined in the second half of the year, even though measured GDP growth was below average. The pace of lending to businesses also picked up.” The market, however, is not certain that the economy will not require further stimulus during the course of the year. Money market rates are pointing to up to two rates cuts over the next 12 months, bringing them in line with our dovish view.
Towards the end of last year, the strength of Australia’s labour data and business activity surveys promoted the view that the Australian economy may have turned the corner. The RBA was resisting pressure to cut interest rates further and arguably the sharp fall in the value of AUD/USD between mid2013 and last 2015 was doing a lot of heavy lifting in loosening monetary conditions.
Since September 2015, however AUD/USD has been trading in a broad range, having lost downside momentum as the greenback fell out of favour. Additionally, CPI inflation is hold close to the bottom of the RBA’s target band and recent data have produced disappointments on retail sales, unemployment, wage growth and company profits.
Australian wage growth in 2015 grew at its slowest pace in 20 years. Annual wage growth was 2.2%, the lowest since the survey began in 1997. Slow wage growth is not an issue peculiar to Australia. A lack of wage growth in the UK and to some extent in the US is currently viewed as a phenomena which will have a heavy influence over the timing of policy moves by both the BoE and the Fed respectively.
In Australia one factor likely contributing to the soggy nature of wage growth is the replacement of high paid mining jobs by lower paid services sector ones. Continued pressure on company profits threatens to enhance the trend. Q4 company operating profits released overnight show a much worse than expected -2.8% q/q decline. Unsurprisingly the pressure on the mining sector remains clear.
Despite this year’s pick-up in iron ore prices, last year’s retreat by both iron ore and coal to multi-year lows will continue to feed through into miner’s balance sheets, into lower household incomes within the sector in addition to lower tax revenue in some areas. That said, the miners profits were not the worst affected in Q4. Corporate profits in wholesale and retail trade both indicate substantial declines. This may in part be a function of low wage growth feeding back into the real economy via subdued demand.
Whatever the cause of weak wage growth, the result is likely to be a slow pick-up in demand led inflation. Continued concern about the pace of growth in China and in particular Chinese demand for commodities is also likely to remain an ongoing theme for Australian this year. Unless USD bulls remerge, the RBA may need to give the AUD a prod to push it lower and we expect further easing this year. We look for a move to AUD/USD0.65 on a 9 mth view.”
(Market News Provided by FXstreet)