A deal struck by European leaders to address the eurozone sovereign debt crisis gives Australia’s central bank another reason not to cut official interest rates this week.
However, future reductions by the Reserve Bank of Australia (RBA) are still on the cards with new data showing the manufacturing and construction sectors remain in the doldrums and a private-sector survey pointing to extremely benign inflation pressures.
Financial markets see little chance of a cut in the 3.5 per cent cash rate at Tuesday’s RBA board meeting, following cuts in May and June, but have priced in a 60 per cent chance of a move to 3.25 per cent in August.
“The RBA board goes into this week’s meeting with some encouragement that European leaders have taken some tangible steps to address what was developing into a full-blown liquidity and thus deeper financial and economic crisis,” National Australia Bank head of research Peter Jolly said.
Treasurer Wayne Swan said the leaders’ meeting late last week was encouraging.
“I thought we were seeing the beginnings of an important breakthrough,” he told Sky News.
Still, the Australian Industry Group/PriceWaterhouseCoopers Australian Performance of Manufacturing Index (PMI) was 47.2 points in June, below the 50-point level separating growth from contraction.
As well, an Australian Chamber of Commerce and Industry (ACCI) survey of investor confidence focusing on manufacturing and construction showed many sector indicators were at the lowest level since the survey began in 1998.
“Clearly this is a very weak survey … it is probably the worst time to introduce a new tax,” chamber director of economics and industry policy Greg Evans told reporters in Canberra on Monday.
The federal government’s $23-per-tonne carbon tax officially started on Sunday and the impost is expected to add 0.7 per cent a year to inflation.
The RBA has said it will look through the impact, as it did when the GST was introduced 12 years ago.
However, the inflation outlook appears extremely benign, although economists expect the central bank to wait until the next round of official price data on July 25 before cutting rates again.
The TD-Securities-Melbourne Institute Monthly inflation gauge fell by 0.2 per cent in June, taking the annual rate to 1.6 per cent – the slowest yearly pace since 2009.
Meanwhile, a report by the federal Bureau of Resources and Energy Economic (BREE) says while commodity prices have peaked, export volumes are expected to grow significantly in the future.
It believes infrastructure in place now is sufficient to meet growing demand up until 2016/17, but long-term planned infrastructure must be delivered to meet growth to 2025.
“If we are going to maintain the efficiency, maintain that competitive edge, we have got to keep investing in capacity and in the infrastructure,” Regional Development Minister Simon Crean told reporters.
“Managing the completion of the projects is critical to reap the benefits of what is expected to be continuing strong growth in commodities and Australia’s position in it.”
