Australia: Policy issues remain - HSBC

In view of analysts at HSBC, energy supply has been a key policy issue for Australia and has put some upward pressure on electricity prices recently, which is expected to add noticeably to the CPI in Q3 2017.

Key Quotes

“Despite the country’s vast quantities of untapped gas reserves, as Australia's new liquefied natural gas export plants have come on stream in recent quarters they have increasingly drawn gas supply away from the domestic market, lifting local gas and electricity prices. This partly reflects government restrictions on coal seam gas extraction in some of the large states. A shift to greater usage of renewables, such as wind and solar, has also increased the cost of energy production and reduced the consistency of energy supply in some states. Energy policy is a key focus for the current administration and a risk to both the growth and inflation outlook.”

“The leverage-fuelled housing price booms in Sydney and Melbourne continue to concern the central bank and prudential authority. As a result of tightened prudential settings the banks have lifted mortgage rates for investors and borrowers on interest-only loans, although they have also lowered effective mortgage rates for owner-occupiers recently. There are some signs that action is cooling activity in Sydney and Melbourne housing markets, although it is too early to be certain that this slowdown will persist.” 

“Risks

Energy supply is a risk to the growth and inflation outlook. Higher electricity prices are set to push inflation higher and could weigh on household spending. The outlook for wage growth also remains a key risk to our central view. Without a pick-up in wage growth, there is downside risk to the outlook for household consumption and our central view that the RBA lifts its cash rate in early 2018. The housing market also remains a risk. A sharper-than-expected cooling in housing market conditions could weigh on growth over the forecast horizon. Finally, as always, China and commodity prices remain key risks for Australia. A fall in commodity prices could weigh on local income growth.”