Australia's RBA swept along in global stimulus rush

[SYDNEY] Australia could well ease monetary policy this week for the second time in as many months as business investment disappoints at home and yet more central banks join the global rush to the bottom on interest rates.

China trimmed interest rates over the weekend, putting pressure on the Reserve Bank of Australia (RBA) to keep easing if only to prevent an undesirable rise in the local dollar.

China is Australia's single biggest export market so the RBA would be relieved Beijing is acting to support demand, but concerned that action was necessary in the first place.

There are plenty of home-grown reasons for stimulus as data showed mining investment in full retreat after a decade of madcap expansion and other sectors unprepared to fill the gap. "The sober message from the report is too disturbing to ignore. Corporate 'animal spirits' remain in very short supply,"said Stephen Walters, chief economist at JPMorgan, while predicting a cut on Tuesday. "It remains a very close call, but we now think the RBA will be more inclined to front-load additional policy stimulus, rather than wait for more information." A Reuters poll of 29 analysts produced the slimmest of margins with 15 tipping a cut and 14 on hold.

Many argue a jolt is needed to reinvigorate an economy that has been running below trend for more than two years now.

Data out on Wednesday is expected to show the economy grew around 2.5 per cent in the last quarter of 2014, compared to a year earlier. That would actually pip the pace of the supposedly outperforming United States, but remain sub par for a nation that used to average at least 3.25 per cent.

The result has been the steady rise in unemployment to a 12-year peak of 6.4 per cent, and a corresponding slowdown in annual wages growth to a 17-year low of 2.5 per cent.

That in turn has helped restrain domestically generated inflation and provided the scope for yet lower rates. Indeed, investors have already priced in two more quarter point cuts which would take the cash rate to just 1.75 per cent.

Yet they are divided on whether the next one will come on Tuesday, with interbank futures 0#YIB: putting the probability at almost 50-50.

The doubt partly reflects minutes of the RBA's February meeting which showed its Board was not then contemplating back to back easings in policy.

Neither did RBA Governor Glenn Stevens sound in any rush to move when testifying before parliament last month. He played down a spike in the jobless rate in January, while noting the local dollar was falling more in line with fundamentals.

Stevens also repeated warnings about the rapid rise of lending for property investing which was fuelling unwelcome home price increases in inner Sydney and Melbourne.

This topic will be high on the agenda at this week's policy meeting as the Board will get an advance briefing on the RBA's twice-yearly assessment of the financial system.

The 60-odd page report is certain to highlight the dangers of debt-driven speculation given the February rate cut triggered a whole new wave of demand with clearance rate at Sydney home auctions near record highs in the last few weeks.

Regulators are working on tighter lending rules for property investment and it is possible the RBA might choose to wait for those to be announced before cutting again.


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