The February Statement on Monetary Policy recently released by the Reserve Bank of Australia (RBA) provides a mostly positive economic outlook for Australia:
- Believing many of the factors behind the 0.5% economic contraction in the September quarter were temporary, the Bank has only slightly downwardly revised its near term growth forecasts, still expecting decent economic growth over the coming two years
- The RBA forecasts GDP growth to rise to 3% in late 2017 and remain above trend for the following two years, partly as the drag from falling mining investment wanes. Further, increases in LNG production and infrastructure spending are expected to push growth higher
- Underlying inflation is expected to rise to the lower band of the 2-3% target set by the Bank, although we may have to wait until mid-2019 to see this
- The RBA anticipates the unemployment rate to fall slightly over time, reflecting a modest reduction of the spare capacity in the labour market.
All in all, this latest statement wasn’t a surprise – and interest rate changes in Australia 2017 are unlikely.
It’s a different story for monetary policy in the US, though. On 21 February, US Federal Reserve Chair Janet Yellen warned it would be “unwise” to wait too long to raise interest rates, potentially foreshadowing a March increase or, at the very least, one before the end of the year.
This comes as the US faces inflationary pressure from President Trump’s flagged expansionary policy, with tax cuts and infrastructure spending signalling the US may be on the cusp of rising inflation. However, as with many of Trump’s policies, the scope, detail and reach are still unknown.
Other things equal, rate rises in the US, and rates on hold in Australia, would place pressure on the greenback to rise and the Aussie dollar to fall.
Elsewhere, monetary policies remain broadly stimulatory, however, the period of peak stimulus appears to be over:
- The European Central Bank continues to keep interest rates at 0%, advising “to remain patient and maintain a ‘steady hand’ to provide stability and predictability in an environment still characterised by a high level of uncertainty”
- In Britain, the Bank of England has kept interest rates at a record low 0.25% and looks unlikely to revise this upwards despite a better than expected economic response to the referendum in June
- The People’s Bank of China has begun using rates as a tool to manage China’s high debt levels and increasing property bubble – increasing rates to its medium-term lending facilities at the end of January as well as lending rates to banks at the start of February
- The Bank of Japan lifted its GDP forecasts for Japan in January for the next two years, with inflation expected to approach the 2% target in coming years. Despite this, the tightening of monetary policy remains unlikely anytime soon
- The Reserve Bank of New Zealand continues to view exchange rates as “higher than is suitable for balanced growth”, meaning interest rates are unlikely to rise above the current 1.75% for a “considerable time”
- Against the grain, in January, the Bank of Canada Governor stated a rate cut “remains on the table” in response to Trump’s proposed protectionist policies.
With this in mind, globally we can expect the cost of funding to inch up over 2017, edging away from the extreme stimulus we have seen in recent years.
And with the US and China leading the way, that will place some downward pressure on the $A.
David Rumbens is a Deloitte Access Economics partner and co-author of our Weekly Economic Briefing.