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Aussie Central Bank May Hold Fire Despite Weakness

Monday, 3 Sep 2012 | 2:53 AM ET

Deteriorating economic indicators out of Australia and its largest trading partner China are building the case for further monetary easing in the resource-driven nation, still economists say the country’s central bank is likely to hold its fire when it meets on Tuesday.

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The Reserve Bank of Australia (RBA) is waiting to assess the impact of interest rate cuts made earlier this year and will avoid further easing until there is more evidence of a slowdown in the domestic economy as well as in China, say experts. The RBA has cut interest rates by 125 basis points since November 2011 to 3.5 percent in June - its lowest level since late 2009.

While the latest data out of China, which accounts for one-third of the country’s exports, pointed to weakness in the world’s second largest economy, Sydney-based Paul Bloxham, Economist at HSBC says it is in line with overall expectations of a slowdown in the mainland, and is therefore unlikely to alarm Aussie policymakers.

The official Chinese Purchasing Managers' Index (PMI) fell to a lower-than-expected 49.2 in August, while the HSBC PMI fell to a seasonally adjusted 47.6, its lowest level since March 2009. A reading below 50 implies contraction in manufacturing activity.

On the domestic front, job advertisements in newspapers and on the internet fell 2.3 percent in August reflecting softening in labor demand, a survey showed on Monday. Separately, retail sales fell 0.8 percent in July against expectations for a 0.2 percent rise - as consumers cut back spending, particularly in the country’s department stores.

“It is too early for the RBA to react to this (retail sales) data – it would indicate panic if they reacted to one month’s data. They will want to look at domestic data for another month,” Stephen Walters, Chief Economist, Australia at JPMorgan told CNBC.

New home sales and building approvals data released last week also pointed to softness in the housing market, but Walters says this is not a concern as real estate prices have begun to stabilize after falling earlier this year.

Home prices in Australia's capital cities were flat in August, according to data from property consultant RP Data-Rismark, following a 0.6 percent rise in July.

Expect Rate Cuts Later This Year

But with continued uncertainty over the health of the global economy, economists are not ruling out further rate cuts later this year.

“International events are likely to dictate the RBA’s next move, in our view, and with global risks to the downside, we expect them to retain an easing bias,” Bloxham said. HSBC forecasts a 25 basis point rate cut in the fourth quarter. The RBA will meet again in October.

Shane Oliver, Chief Investment Strategist and Chief Economist at AMP Capital, who also forecasts one more rate cut around December, adds that declining commodity prices could be the trigger for the central bank, after iron ore prices hit a three-year low last week.

“Weakness in the iron ore price and the subsequent threat to the economy only adds to our assessment that rates need to fall further,” Oliver said in a note.

A sustained fall in iron ore prices would impact the country’s export revenue and add pressure on the Federal budget, which is struggling to achieve a surplus this year, according to Oliver.

“The effect that an unchecked slide in export revenue could have on the Australian economy will become a more important factor in the board's thinking in the months ahead,” he said.

Australian policymakers will also be closely watching developments in the West, with the European Central Bank and Federal Reserve holding their policy setting meetings over the next two weeks.

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