The Reserve Bank has pulled back from the brink, declaring there is now no urgent need to lift interest rates and pointing to Australia’s “subdued” non-mining economy and the Greek debt crisis.
The Bank’s changed position outlined in board minutes released yesterday came as the nation’s chief commodity forecaster substantially boosted forecasts for export income in the coming year, led by an upgrade in iron ore sales and prices.
“We have just witnessed a fairly significant Reserve Bank back-flip,” said ICAP Securities economist Adam Carr. “In May the board minutes were firmly eyeing a hike. The June minutes show the board has taken a step back. Its finger is no longer on the trigger.”
The Reserve Bank board minutes point to a weaker than expected domestic economy saying while there has been a strong pick-up in mining investment, activity elsewhere remains “quite subdued”.
Away from mining, investment intentions were “considerably weaker” with “little evidence of a pickup” in non-residential building construction. Households were “cautious,” the housing market “soft” and retail sales growth “moderate”...
The high dollar and the Reserve Bank’s own action in raising rates in November were acting as a drag on the economy as well as the withdrawal of budget stimulus measures which was set to “exert a significant contractionary impulse on aggregate demand over the next two years”.
The board expressed its strongest concern to date over the Greek debt crisis saying “whereas in earlier months the debt problems of Greece, Ireland and Portugal had been largely reflected in the interest rates of those countries, over the past month they had spilled over to long-term rates for some other European countries”.
The minutes say while “further tightening in monetary policy would be necessary at some point” the flow of data in the past month has “not added any urgency” to that need. Downside risks to the global economy had become “a little more prominent”.
The quarterly forecasts released by the Bureau of Agricultural and Resource Economics and Sciences have mineral exports reaching a record high of $218.3 billion in 2011-12, revised up from $214.6 billion.
Total commodity exports are expected to hit $256.3 billion, an increase of 18 percent on 2010-11.
While the Bureau has slightly downgraded its forecast of iron ore earnings in 2010-11 largely due to cyclone activity, it upgraded next year's forecast by $2.2 billion to $65.3 billion.
Coal export earnings have been revised down but are forecast to be 31 per cent higher in 2011-12 due to both higher volumes and prices.
Income from live cattle will be down 17 per cent in 2010-11 due to the ban on exports to Indonesia and also due to earlier restrictions imposed by the Indonesian government itself on the weight of cattle and the number of permits.
Published in today's SMH and Age
. The market is pricing in slight rate CUTS, until March 2012
. Reserve poised, however gentle its language
. Ouch! Commodity prices jab still higher
ABARES AUSTRALIAN COMMODITIES