Aussie central bank stranded as reflation skips economy

Bloomberg

Australia is emerging as an outlier in the developed-world story of faster economic growth and inflation, pushing the central bank to the sidelines as flat wages and a strengthening currency keep prices in check.
Reserve Bank of Australia Governor Philip Lowe and his board will keep interest rates unchanged at a record low for an 18th month at Tuesday’s policy meeting, the year’s first, money market bets and economists’ forecasts show. Neither see a serious chance of tightening before the fourth quarter, while a vocal minority expect policy makers will stand pat all year.
“Strong global growth and the long-awaited recovery in global inflation have increased the risk that central banks turn more hawkish,” said Tom Kennedy, an economist at JPMorgan Chase & Co. in Sydney. “The Australian economy is facing a different set of challenges and our expectation is for the RBA to leave the cash rate unchanged at 1.5 percent across the forecast horizon.”
The spoils of a record hiring spree have been partly offset by rapid population growth, with jobless rate still half a percentage point above assumed full-employment and wages going nowhere. While business investment has turned, adjustment from the fat years of a China-fuelled mining boom has dragged on that recovery compared with global peers.
Moreover, after almost doubling in response to RBA rate cuts, Sydney house prices have started to slide as macroprudential policies deter investors. With a lack of pricing power in the economy — and Amazon.com Inc. predicted to spur further retail deflation — there’s little pressure on policy makers to act.
Also constraining the central bank is the currency’s 5% appreciation between the last board meeting in December and on Feb 2. That’s slicing into exporters’ margins as local products become more expensive and cutting the cost of imports, further compressing inflation.