Australian Economy

China’s economic woes add to Reserve Bank’s policy challenge

The Australian dollar rose 0.6 per cent to US70.15¢, its third consecutive day of gains, but was still nursing hefty losses, having dropped more than 7 per cent since early last month. The local currency took another blow on Monday after official data showed China’s April retail sales sank 11.1 per cent, almost twice the forecast decline.

China’s industrial output fell 2.9 per cent against a slight increase anticipated by economists. The local dollar is sensitive to news about China because of the countries’ strong trade links. The world’s second-largest economy is Australia’s biggest export destination, particularly for iron ore which is used in steel making.

Minutes of the Reserve Bank’s April policy decision released on Tuesday confirmed further tightening in the future.

The minutes revealed the RBA considered three options for April’s cash rate increase: 15 basis points, 25 basis points or 40 basis points. It elected for a 25 basis point rise to 0.35 per cent, from 0.1 per cent, last month.

A 15 basis point move was dismissed as inappropriate given policy was already very stimulatory and further rate rises would be required. Moreover, a 15 basis point increase was inconsistent with historical practice, the minutes said.

The decision between 25 basis points and 40 basis points appeared more balanced.

Bill Evans, chief economist at Westpac, has predicted a 40 basis point move in June. He said “the lack of a clear argument against the 40 [basis points] in May in the minutes and the fact that they refer to the level of rates being ‘very stimulatory’” supported his case.

Key numbers

Wages data due on Wednesday and employment figures on Thursday could cement the RBA’s view that a tight labour market was indeed finally lifting pay.

The Wage Price index is forecast to rise 0.8 per cent in the first quarter, compared with the December quarter, and 2.5 per cent year-on-year. April unemployment is expected to fall to 3.9 per cent, the first break below 4 per cent since the early 1970s.

Commonwealth Bank said wages growth of at least 0.9 per cent, or an unemployment rate below 3.8 per cent, could sway the RBA to lift in June by 0.4 of a percentage point.

“We expect a shallow rate hike cycle with 25 basis points in June, July, August and November 2022 and one final hike in February 2023, [to 1.6 per cent],” said CBA head of Australian economics, Gareth Aird.

ANZ’s head of Australian economics, David Plank, set the WPI threshold slightly higher than CBA. He predicted a jump of at least 1 per cent was needed to trigger a 0.4 percentage point increase to the cash rate.

Chinese pain

The US dollar has gained 6.3 per cent against a clutch of major currencies since the US Federal Reserve started lifting rates mid-March. Last week, it climbed to its highest in 20 years, above 105.

Data released on Monday night that showed an abrupt fall in New York state’s factory activity and a collapse in new orders and shipments only deepened concerns about the health of the world’s largest economy.

The New York Fed’s Empire State Index on current business conditions tumbled 36.2 points to a reading of -11.6 this month. A reading below zero signals a contraction in the manufacturing sector.

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