Australia's top central banker reassures on mining, hints that interest rates are on hold
Australia’s central bank chief said on Friday there was no sign the mining boom is over and signalled that interest rates are likely to stay on hold unless there is a drastic change to its optimistic outlook for the economy.
Reserve Bank of Australia (RBA) Governor Glenn Stevens said the resource-rich economy was growing at its potential and inflation was consistent with its 2-3 per cent target band, although he conceded the global environment was still weak.
“I probably describe myself as cautiously optimistic. I have tried to get people to see the glass half full rather than half empty, because I do think we risk talking ourselves into more gloom than we really should,” he told lawmakers in his twice-yearly parliamentary testimony in Canberra.
Stevens reiterated that it was too early to tell the effects of past interest rate cuts. The RBA has lowered its cash rate by 125 basis points since November to 3.5 per cent.
But he said the bank was prepared to respond to any ”significant deviations” to its central outlook.
Financial markets took his comments in their stride with the Australian dollar little changed at US$1.0437. Interbank futures were flat, implying a scant 16 per cent chance of a rate cut at the September 4 policy meeting.
Over a 12-month period, the market still has around 50 basis points worth of cuts priced in.
Stevens’ comments came just days after BHP Billiton , the world’s biggest miner, shelved two expansion plans in Australia worth at least $40 billion, prompting Resources Minister Martin Ferguson to declare: “You’ve got to understand, the resources boom is over. We’ve done well - A$270bn in investment -- the envy of the world,” he said, sparking fears the country’s mining boom had come to an end.
The government was quick to soothe those concerns. Finance Minister Penny Wong said on Thursday there was still over half a trillion US dollars worth of mining investments in the pipeline, with half at the advanced stages of development.
“I don’t myself think that at least at this point, I’ve seen evidence to cause us to mark down that side of the outlook materially,” Stevens said.
He said there are many projects in the pipeline and believed some shouldn’t be done “because if they are attempted, there is already pressure on the cost side for resource companies doing what they are doing.”
He repeated the central bank’s view that the once-in-a-century mining investment boom would probably peak in the next year or two.
That eventual decline was then seen offset by a ramp-up in resource exports as well as a gradual strengthening in some parts of the non-mining economy like residential construction.
BHP had blamed a high Australian dollar, falling commodity prices and soaring development costs for pulling the projects.
Stevens said the central bank had not intervened to bring down the value of the Australian dollar, noting such a move would be a very big call.
The central bank has said before that part of the reason for the currency’s resilience was due to robust foreign demand for Australia’s top-rated government bonds.
On China, Australia’s single biggest export market, Stevens said growth there looked to have slowed to a more sustainable pace, although the impact on commodity prices was still being worked through the markets.
Overall, Stevens said Australia is forecast to grow at close to trend pace, albeit with a different composition from that seen in the past year or two, and inflation consistent with the target.