September 18, 2018 / 5:22 AM / 2 months ago

Australia's central bank warns trade tensions a 'material risk' to upbeat outlook

SYDNEY (Reuters) - Australia’s central bank is sounding upbeat about a sturdy labor market, a falling currency and resilient household consumption, but warned protectionist trade policies in the United States were a “material risk.”

An ibis bird perches next to the Reserve Bank of Australia headquarters in central Sydney, Australia February 6, 2018. REUTERS/Daniel Munoz

The global picture was muddied by an escalating tariff row after the United States announced import duties on a number of countries including China earlier this year, minutes of the Reserve Bank of Australia’s (RBA) September policy meeting showed.

“Members observed that there were still significant tensions around global trade policy and that this represented a material risk to the outlook,” minutes showed.

“The direction of international trade policy in the United States continued to be a source of uncertainty for the outlook for the world economy.”

The warning comes as U.S. President Donald Trump announced tariffs on another $200 billion worth of Chinese imports.

The RBA Board reiterated the need for domestic monetary policy to remain accommodative for some while yet, as it awaits a further fall in the unemployment rate and a pick-up in inflation.

The RBA last cut rates to 1.5 percent in August 2016, notching up the longest period without a change in modern history. Financial markets <0#YIB:> are wagering this steady spell could extend into 2020.

Indeed, the Board saw “no strong case” for a near-term shift, although the next move in the cash rate would more likely be an increase.

The meeting took place just a day before official data showed Australia’s A$1.8 trillion economy marked its 27th year without recession as annual gross domestic product (GDP) growth hit 3.4 percent in the second quarter.

Household consumption, which has remained a constant “source of uncertainty” for the RBA, had rebounded in the period to add 0.4 percentage points to GDP.

Recent strength in the labor market, an increase in minimum wages and the promise of personal tax cuts have helped reduce some of the uncertainty around the outlook for household consumption, members noted.

There was also a “notable decline” in youth unemployment rates in recent months while forward-looking indicators of labor demand pointed to strong growth in the period ahead.

The RBA noted an ongoing drought had hit eastern Australia saying it might lead to lower overall rural production and exports in the second half of the year.

The increased probability of an El Nino event meant the prospects for rain in drought-affected areas was weaker in the near-term, which was likely to increase the magnitude of any fall in farm output, the RBA said.

Board members downplayed recent increases in mortgage rates by domestic lenders noting there was still evidence of competition for good quality borrowers.

In the past couple of weeks, three of Australia’s four biggest banks including No.1 lender Commonwealth Bank of Australia have raised their variable mortgage rates citing higher funding costs.

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