Aussie dollar, China to determine future interest rate decisions

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Australia’s central bank said the outlook for the currency and China are key uncertainties to its growth and inflation forecasts, which were otherwise little changed.

The Reserve Bank of Australia, in its quarterly statement Friday, predicted annual growth of 2.5% to 3.5% through December, accelerating to around 3% to 4% in 2018.

There was little near-term change for unemployment and core inflation was expected to remain below 2% for most of the forecast period through 2018. It gave no interest-rate guidance after cutting to a record-low 1.5% last Tuesday.

While the currency is forecast to remain at current levels, “it represents a significant source of uncertainty” given its potential to react to changed growth outlooks, commodity prices and policy decisions at home or abroad, the RBA said.

Meanwhile, China, Australia’s key trading partner, “remains an important source of uncertainty” -- from a possible slowdown in the property market to how authorities balance supporting growth while enacting disruptive reforms.

Governor Glenn Stevens and his board eased policy twice this year to try to keep a lid on a currency circled by yield-hungry investors in a world of zero or negative rates, and to speed up inflation.

At the same time, they’ve made progress on steering the economy toward services from mining, with growth above 3% and unemployment under 6%.

‘Clear Reluctance’

“The RBA’s clear reluctance to ease suggests that unless the inflation figures for the third quarter are very weak, the dollar strengthens towards 80 U.S. cents and/or GDP slumps, rates are unlikely to be cut again in the coming months,” said Paul Dales, a Sydney-based economist with Capital Economics.

“We think things will be different early next year when underlying inflation is not rising as the RBA expects,” he said. “At that point, rate cuts will come back on the table and the RBA may reduce them to 1%.”

The Aussie edged higher on Friday, buying 76.57 U.S. cents compared with 76.37 cents before the report.

The RBA noted that a key missing ingredient is corporate investment, though the drag from unwinding resource investment is likely to ease.

“The outlook for non-mining business investment remains subdued in the near term,” the central bank said. “However, the subtraction from GDP growth from lower mining investment looks to have peaked in the 2015/16 financial year.”

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