RBA Cuts GDP Inflation Forecasts

The Reserve Bank of Australia has downgraded its forecasts for Australia’s GDP growth and inflation giving an insight into its reasons for cutting the official cash rate to a record low on Tuesday.

In its latest quarterly Statement on Monetary Policy, the RBA revised the forecast for GDP growth for the year to June to 2.25 per cent, compared with a forecast of 2 to 3 per cent for the same period in the bank’s previous estimate. The forecast for the 2015 year was cut by 0.25 per cent to 2.25 to 3.25 per cent.

The RBA slashed its inflation forecast for the year to June to 1.25 per cent, down from its former estimate of between 1.5 per cent to 2.5 per cent in its November statement.

The central bank cut the official cash rate to 2.25 per cent earlier this week, meeting market expectations, but surprising many economists, who believed the bank would hold or cut at a later date.

The RBA said today it downgraded the growth forecasts as the Australian economy had been growing at “a bit below its average rate” in the second half of 2014, while the end of the mining boom was dampening inflation growth.

“While growth in non-mining activity has picked up a little over the past two years, all components except dwelling investment look to have grown at a below average pace over the past year,” the RBA said.

GDP growth is now expected to remain below trend over the course of this year and then to pick up to an above-trend pace in the latter part of the forecast period, in response to rapid growth in LNG exports and the lower exchange rate and interest rates.

But the bank also said gas exports were expected to increase less rapidly than first thought, picking up less slack from the end of the mining boom.

This suggested that consumption will continue to grow at a below-average pace for a time and non-mining investment will remain subdued until at least mid-2015, the RBA said.

In particular, the ABS capital expenditure survey suggests that there will be only very modest growth in non-mining investment in the 2015 financial year, according to the statement.

Lower commodity prices and the depreciation of the exchange rate in the Australian dollar have offset some of this gloom, the RBA said.

This forecasts in this statement are based on the price of Brent oil remaining at US$59 per barrel, which is more than 30 per cent lower than the price forecasts used in November.

“The decline in oil prices is expected to have a positive effect on overall growth in the Australian economy,” the RBA said.

After a year and a half of stable interest rates, the board said on Tuesday that a reduction in the cash rate was appropriate, taking into account the flow of recent information and updated forecasts.

Explaining the rate cut, Mr Stevens said earlier this week that available information in Australia suggested growth was continuing at a below-trend pace, with domestic demand growth overall quite weak while the jobless rate has gradually moved higher over the past year.

Most analysts believe there will be another interest rate cut this year because of a gloomier economic outlook. The Reserve Bank historically has a higher chance of making a second cut in the month directly after a first move.

This news story is reprinted from www.businessspectator.com.au

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