Interest rates to stay low as mining sector drops away
Interest rates are likely to remain low for the remainder of the year as the Reserve Bank of Australia (RBA) looks for other sectors of the economy to pick up the growth previously supplied by the mining sector.
PIMCO head of portfolio management Robert Mead and fixed income portfolio manager Adam Bowe stated that mining investment had grown over the past 12 years but data for the first half of 2013 suggested the sector was tapering and detracting from real growth.
Mead and Bowe said that as a result of this tapering and decline - and to encourage growth in other parts of the economy - the RBA “will have to keep interest rates low for an extended period and likely lower them further to help smooth the transition away from mining-assisted growth over the cyclical horizon”.
According to Mead and Bowe there are three possible growth scenarios that may take place, with the first being that companies outside of mining begin to invest in their businesses again.
“Unfortunately, we have yet to see this process take place, with real growth in non-mining business investment actually contracting over the year to June 2013,” Mead and Bowe said.
The second possible growth scenario is that which has already taken place in the first half of 2013, where no sector drives economic growth, which saw the RBA reduce the cash rate by 0.5 per cent this year.
Mead and Bowe said the third scenario, which they described as ugly growth, was where household spending jumped due to lower interest rates but would create long-term risks as that sector was already highly leveraged; however the likelihood of this scenario is at odds with the evidence.
Mead and Bowe said real household consumption growth decreased in June to its slowest year-over-year pace since the third quarter of 2009, while retails sales had only grown by 1.9 per cent for the year and are below the 30-year average of around 6 per cent.
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